Recent loss creep trend highlights potential for Ida to top $30bn

Expectations that Hurricane Ida insured losses will hit and potentially exceed the top end of modelled estimates have built throughout #ReinsuranceMonth, fuelled further by the release of an initial $26bn estimate from Property Claim Services (PCS).

The figure is largely in line with the midpoint of current estimates provided by modelling firms AIR Worldwide and CoreLogic. 

RMS, with a midpoint private market estimate of $31bn, remains the highest of the publicly available modelled estimates. However, the provisional PCS estimate highlights potential for the ultimate industry cost of the event to potentially reach – and possibly surpass – the $35bn top end of RMS’ modelled range.

The initial PCS estimate factors in a broad range of property coverages including fixed property, building contents, business interruption and auto, as well as some inland marine exposures.

The firm’s estimates are based upon data confidentially collected from insurers, agents, adjusters, public officials and others. That information is combined with what it describes as “trend factors” to then compile its loss estimate.

Because the process is repeated periodically as more information on the catastrophe event becomes known and losses develop, the estimates typically change over time. That means loss creep is an inherent risk.

And with commercial insurers and reinsurers telling this publication in recent days that claims information and cedant reports from Ida are only slowly materialising, the expectation is that the creep factor will be high on the loss.

Sources have already commented that the PCS estimate includes only just over $6bn so far from the section of the US eastern seaboard from Virginia to Maine, with the $2.23bn assigned to New York state seen as potentially light.

Creeping history

Recent history of US hurricane losses suggests that the likelihood of meaningful deterioration with Ida is high.

Hurricane Irma losses have continued to creep this year, four years after the event, demonstrating the potential for a meaningful tail on a natural catastrophe loss.

The ultimate total incurred industry number for the storm reported by the Florida Hurricane Catastrophe Fund (which is based off carriers that reinsure with the fund) deteriorated from $14.84bn at the end of Q3 last year to $16.04bn at the end of April this year.

The 8 percent increase came after much more significant creep in the earlier development cycle of the loss.

While Florida has specific challenges – largely in its litigation environment – that arguably create a greater creep factor than other states, last year’s loss events are proof that loss deterioration is a real phenomenon elsewhere too.

Louisiana – which accounts for more than $19bn of the PCS Ida number – reported a 25 percent Q1 2021 increase in loss estimates for Laura, Delta and Zeta, the trio of hurricanes that hit the state last year.

The number crept further from $9.6bn to beyond $10bn in Q2.

The factors that have driven loss creep in the last couple of years – Covid-19 and additional demand surge factors around labour and material costs – have only been heightened in 2021.

Inflation for both of those factors had already been running high in the northeast – just ask anyone with an ongoing building project – and is expected to accelerate in the months ahead. There is also the spectre of social inflation and political pressure around the payment of “grey area” claims to account for.

And sources have said that the flood element of Ida and the lack of information from insureds is a factor that could add to claims inflation on the commercial property side of the loss once that picture becomes clearer.

What is already clear is that if the loss moves beyond $35bn it becomes a “proper loss” (as one source described it) that is significantly more meaningful for reinsurers and retrocessionaires – and the upcoming renewal season.

Reinsurers’ share of losses

The extent to which losses will be split between insurers and reinsurers will be dependent on individual portfolios and contractual terms, but already several carriers have indicated they will be making reinsurance recoveries following the event.

Most notably, Allstate said it expected to make significant recoveries through its nationwide excess catastrophe reinsurance program, with the carrier retaining just $631mn of pre-tax Ida gross losses of more than $1.4bn. 

Allstate’s 2021 nationwide excess cat reinsurance program provides coverage up to $5.763bn of loss less a $500mn retention and is subject to the percentage of reinsurance placed in each of its agreements.

The coverage includes per occurrence excess agreements placed in the traditional reinsurance market in 2021 that consist of four contracts providing coverage of $3.250bn in excess of a $500mn retention and exhausting at $3.750bn per loss occurrence, two eight-year term contracts and one single-year term contract providing coverage in excess of a $3.750bn retention.

Reinsurers are also set to take a significant share of Progressive’s Ida losses, which totalled $510mn as of 15 September. 

Progressive said its August results included $341.9mn of cat losses, or 9.7 loss ratio points, associated with Hurricane Ida. The carrier said its property division retained $180mn of losses and $20mn of allocated loss adjustment expenses during August, with the excess covered under its occurrence excess of loss reinsurance program.

The Hartford, in contrast, has said it expects a bill of roughly $200mn from the event, below the attachment point of its reinsurance program.

While The Hartford is not a major personal lines player, where much of the loss is expected to be felt in Louisiana, and is not one of the 10 largest commercial lines carriers in the state, the losses will come in above its third-quarter catastrophe budget of $150mn.

Others to disclose Ida losses include The Hanover, which has said its $75mn of pre-tax estimated losses from Ida primarily stem from losses in the northeast and, to a lesser extent, the Gulf and Mid-Atlantic states.

In addition, Florida-based carrier United Insurance Holdings estimated on 9 September that its current year catastrophe losses incurred in the third quarter through 31 August are $27mn before income taxes, net of expected reinsurance recoveries, including a full retention loss from Ida.

And FedNat has said that it expects gross losses from Hurricane Ida will exceed the combined $18.3mn retention across its two separate reinsurance programs.

Another active season

Ida will likely rank as one of the costliest hurricane losses on record, but it has been the only significant insured loss of the 2021 Atlantic season.

This is despite another active season which, at the time of writing, had seen 19 named storms. Last year’s record-breaking Atlantic season is the only one on record to have seen so many storms at this stage of the year.

Nicholas, which made landfall as a Category 1 hurricane in Texas, is estimated by RMS to have caused $1.1bn to $2.2bn of insured losses, a range which includes up to $500mn of National Flood Insurance Program losses.

Grace made landfall in Mexico as a Category 3 hurricane, with Karen Clark & Company estimating insured losses from the storm at $330mn, while Larry impacted Newfoundland in Canada as a Category 1 storm.

Several other named events have impacted the US as tropical storms, but losses from each are not expected to be significant and will likely range from the tens to low hundreds of millions of dollars.

Modelling the loss

Modelled estimates for Hurricane Ida suggest the event will be one of the costliest hurricanes on record for the (re)insurance sector. 

RMS has published the highest range among modelling firms, estimating insured losses from Ida at between $31bn and $44bn. This range does include National Flood Insurance Program losses of between $3.8bn and $6bn and offshore impacts of between $0.7bn and $1.5bn – both factors excluded in the estimates provided by rivals AIR Worldwide and CoreLogic.

Strip out these elements and the RMS range has a midpoint of $31.5bn, significantly above its peers at AIR ($25bn) and CoreLogic ($24bn). Both the AIR and CoreLogic estimates are closer to the initial $26bn estimate published by PCS.

While most expect losses from the event to creep upwards, it should be noted that estimates from the modelling firms factor in potential loss amplification factors such as demand surge.

Karen Clark & Company has not updated the initial $18bn loss estimate it provided in the immediate aftermath of the event – the other three modelled loss ranges have been updated to factor in the flooding caused by Ida’s remnants as it moved over the northeast US.