$18bn+ Ida brunt expected to weigh on personal lines

Hurricane Ida looks to be developing a loss profile where claims are more heavily weighted to personal than commercial lines – albeit less so than with last year’s Hurricane Laura – and where a meaningful share will be taken by the E&S market and reinsurers, both represented in Lloyd’s.

But with a lack of real information from the ground and a wide spread of output from event comparisons by cat modelling firms after landfall, what are the meaningful early takeaways from the fifth strongest storm ever to hit the US mainland?

Modelled v unmodelled

As this publication reported earlier this week, the early consensus of expected loss quantum from a range of industry sources initially converged around $20bn, within a range of $15bn to $25bn.

That included RMS stochastic event analysis provided to clients for wind and storm surge of between $8bn and $28bn across a range of tracks with a median of $16bn, as well as a similar unofficial early number of $17.5bn from Karen Clark & Company (KCC).

These early client releases from the vendors are not official industry loss estimates but they are seen as instructive in the market for where those numbers might come out in the coming days and weeks.

Indeed, at the time of going to press on 1 September, KCC issued a formal $18bn loss estimate.

But the market also acknowledges the potential for unmodelled factors that mean an ultimate loss number several months (or even years) down the line can deviate significantly from initial modelled estimates.

As one senior underwriting executive put it this week: “If they say $16bn it’s probably closer to $25bn or $30bn.”

A source from one of the larger brokers added that a $15bn to $25bn range “feels like a baseline”, as his firm continues to assess various factors that could drive actual losses outside of the range.

“If they say $16bn it’s probably closer to $25bn or $30bn”

Another underwriting source said they expect losses to come in “well north of $20bn”, based on the strength of the Category 4 storm and the extent of property damage on the coast, as well as the fact that late movement brought sustained 90 mph winds to New Orleans for a number of hours.

Ida appears to have several characteristics that make it a likely candidate for model miss.

Post-event loss amplification

As previously reported, they include several post-event loss amplifiers that could add to the impact of standard demand surge seen after major catastrophe events. One is the ongoing disruption caused by Covid-19, with the Delta variant surging in Louisiana, creating challenges for the adjusting process as well as clean-up, rebuild and recovery, which can help mitigate the quantum of loss.

Another is core or economic inflation, with the retail price index running at more than 5 percent and a more general issue around materials and labour costs. Then there is the issue of social inflation, with the potential for some of the legal issues that have been such a factor in Florida in recent years impacting the claims process, particularly in the homeowners market in Louisiana.

One commercial property underwriting source said his firm would take any reserve from a claims adjuster and add 25 percent to account for factors likely to inflate the final payout.

Power outage

A key factor that could drive losses higher is the impact of the power outage that has left more than a million people without electricity, including the whole of New Orleans.

Sources have so far pointed to two sources of loss directly related to the length of time before the electricity infrastructure is fixed: mould and business interruption.

The duration of the outage is critical to the first. The inability to pump rising water from buildings already flooded, or to dry out areas impacted by rainfall entering as a result of roof or wall damage, can lead to significant mould problems within a week.

Reports have suggested that some areas are unlikely to regain power for weeks. The longer the mould remediation efforts are held back, the greater the potential for costly claims where the peril is not excluded.

Commercial property covers typically sublimit mould, if it is not excluded altogether, often in a range of $500,000 to $1mn, or up to $5mn at the most. But the widespread nature of the problem could aggregate to significant additional losses.

The power outage and clean-up delay will also likely drive business interruption losses in commercial lines, sources said, with losses capped at the number of days of interruption or as a dollar sublimit.

When the claims roll in

Market sources have so far pointed to a lack of claims information at this early stage only a few days after Ida made landfall.

Commercial insurers would typically expect to see claims pick up pace after the first week or so and to have a good sense of the position of the overall volume two to three weeks after the event, at which point traction on building inspections will also have picked up.

“There is confidence that the wind vs water issue in New Orleans – which was a major sticking point after Hurricane Katrina in 2005 – will not emerge in the same way post Ida”

Reinsurers could begin to get loss notifications from insurers as early as a week after the event but would not be clear on the ultimate loss for as long as six months.

At this time there is confidence that the wind versus water issue in New Orleans – which was a major sticking point after Hurricane Katrina in 2005 – will not emerge in the same way post Ida. Overall storm surge levels were below those resulting from Katrina, the costliest ever US hurricane.

However, in a note Guy Carpenter said that in line with previous hurricanes that have brought significant storm surge and heavy rainfall, insurance policy terms will play a “meaningful role” in claims adjustment.

That will especially be the case in areas that saw a combination of winds capable of meaningful damage, freshwater flooding from rain totals of more than a foot, and coastally exposed locations where there has been significant seawater inundation.

Commercial v personal lines

As more claims data emerges, the expectation (at least for now) is that the Ida loss will be more heavily weighted to personal lines and commercial residential than other areas of commercial property.

Commercial property sources in the large account space said that they have seen very little evidence so far of any concerning losses from the storm.

But the SME property and habitational markets are likely to present a very different picture, with apartment buildings, multi-family homes, condos and other commercial residential properties already showing meaningful damage, particularly along the coast from New Orleans where some of the strongest winds were felt.

Other sources of claims are likely to come from hotels and hospitality, as well as hospital buildings and retail.

The fact that the reinforced levees designed to protect New Orleans from storm surge appear to have stood up to the Ida test means that compared to Katrina the commercial flood element of losses is likely to be relatively low.

The story in the homeowners market is likely to be different however, which could lead to a meaningful impact for the National Flood Insurance Program.

Wind damage in the homeowners market is also likely to be significant and a major driver of claims for a market dominated by State Farm and other national carriers, although smaller regional carriers that rely heavily on reinsurance also play a significant role in Louisiana.

Retained v ceded loss

With a heavy emphasis on homeowners losses as well as the SME market and habitational risks, the expectation is that Ida will be a meaningful hit for reinsurers.

Although the giants of State Farm, Allstate, Progressive, USAA and others that have the biggest shares of the homeowners and personal auto markets in Louisiana tend to have relatively high attachment points for their cat covers, the further the loss moves into the teens of billions of dollars and beyond the greater likelihood of the first layers of those towers coming into play.

After the shock of Winter Storm Uri earlier this year and other smaller weather events, there is also an expectation that some aggregate protections will also pay out on Ida.

Smaller homeowners carriers will certainly be a source of reinsurance losses, with their heavy reliance on reinsurers and low attachment points – sometimes in the low single-digit millions of dollars.

The Louisiana homeowners market includes UPC Insurance, Lighthouse, Americas and FedNat, while Louisiana Citizens would also be expected to cede meaningful losses to reinsurers, while MGAs including Orchid are also thought to be active.

Meanwhile, SME property losses including habitational are likely from MGAs operating in the state such as AmRisc, Amwins SRU and Icat, as well as from E&S carriers.

Other sources of loss are likely to include smaller manufacturing and warehousing insureds.

And the other great unknown at this stage is the extent of losses from the energy market – both onshore and offshore.

Trapped ILS capital

Another likely outcome from Ida is a further year of trapped capital for collateralised writers that have not yet established a mechanism to address a problem that has dogged the sector through several consecutive years of cat loss activity.

At the mid-year renewal there had been a strong return of appetite from ILS funds. If Ida turns out to be another major model miss, could that lead to another retrenchment from investors?

At this point, the event is not expected to be a major loss for ultimate net loss retro writers, although it will likely lead to aggregate retention erosion.

Pricing impact

If there has been a broad industry consensus that the first eight months of 2021 saw a deceleration of rate increases in most areas of commercial property, then now there is agreement that some of that pressure will ease.

Directly impacted areas of the market such as habitational may see an acceleration of increases again.

As one senior underwriting source put it: “It’s going to be a meaningful event for the industry and anybody who thought the market was going to slow down in the second half of 2021 is probably going to be reassessing that situation.”

Coming at the start of preliminary conversations in the lead-up to the key 1 January reinsurance renewal, there may also be greater willpower from reinsurers to push the line harder and try to gain some kind of momentum on pricing that has lagged primary (and retro) in the last few years.

Absent meaningful losses this hurricane season, the expectation was that rates would be flat to down at renewal.