Can the insurance industry withstand two historic catastrophes in a fortnight?

Can the insurance industry withstand two historic catastrophes in a fortnight?

Can the insurance industry withstand two historic catastrophes in a fortnight? The USA is enthralled in an intense battle with mother nature – and she is certainly making her ferocious presence felt.

Last week, Hurricane Harvey battered Texas and Louisiana in what was “the most economically significant natural catastrophe in American history,” according to Howard Mills, global insurance regulatory leader at Deloitte.

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But it seems the country will have no respite. It’s widely expected that Hurricane Irma, currently a category 4 storm, is likely to strike Florida this weekend. It’s believed Irma could be of “historic size” and could dwarf Harvey to become the natural catastrophe with “the most significant economic loss” the country has ever seen.

Will the insurance industry be able to cope with two historic catastrophes in such a short period of time?

Yes, according to Mills. The insurance industry is in a very strong position to deal with a number of major catastrophes because it is “very well capitalized” and has had time to recover and rebuild capital since the last major incident of Super Storm Sandy.

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“Hurricane Harvey and Hurricane Irma (if it makes US landfall) are both very significant events and the losses are going to be huge,” said Mills. “But the insurance industry is very well capitalized and is well positioned to withstand these storms. I don’t see any problems with the ability of the industry to absorb these horrific losses.

“Thanks to the regulatory regime in the US, the regulators require capital to catastrophic levels. They have modelled very significant events, such as these two storms, and the capital required is in place. I have absolutely no doubt that the insurance industry will have a swift, comprehensive and helpful response to these storms.”

For Hurricane Harvey, the economic damage is likely to be greater than the insured losses because of a serious protection gap when it comes to flood coverage. The amount of uninsured or underinsured people in Texas who have had their whole lives destroyed is one of the “real tragedies” of the storm, added Mills.

“People just don’t understand that the standard homeowners’ policy does not cover flood,” Mills commented. “The purchase of flood insurance from the National Flood Insurance Program (NFIP) is affordable and readily available. But people just don’t think a major flood event will happen to them, which makes the sale of additional flood insurance very difficult. It’s a problem we’ve been struggling to fix for years.

“Perhaps it has something to do with people thinking Congress will bail them out. There’s going to be a massive recovery effort after Harvey in Texas, but that money is going to go to things like public infrastructure. If you’re totally uninsured, the government is going to provide some assistance but it’s not going to rebuild your house like a full replacement policy with flood insurance would. So people are going to have some very significant losses.”

In Florida, the take-up rate for flood insurance is significantly higher, so the insured losses could far exceed those in Texas, depending on the track Irma takes. Mills added: “The good news is that the insurance industry is so well capitalized that it’s well prepared to handle these storms.”  


Related stories:
Florida insurers speak out as Irma looms
Post-Harvey and pre-Irma, Marsh advises insureds
2 Comments
  • Tired of It 9/9/2017 3:34:25 PM
    The problem with the NFIP is that the majority of losses paid are on homes that experience multiple flood claims. The rest of the population in the United States is subsidizing flood insurance for people who have homes near coastal locations...homes that usually carry a high price tag since they have a water view. The bottom line is that if you can afford a house near or on the water then YOU should be able to afford your own flood insurance on the property without my assistance. Otherwise, don't live near the water OR at least stop using my tax dollars to fund for you to be able to afford the flood insurance on your coastal property. I do realize that there are exceptions to this rule and that the NFIP is important for some communities. However, if the home has experienced multiple flood claims in the program then it's time to move out of the flood zone. We are funding for people to continue to keep their million dollar homes in areas that experience repeated flood events. In my humble opinion this is like buying crop insurance for people that live in the Sahara Desert...of course they're going to make claims as crops don't grow in the desert. If you buy a house on the water in or in a community that repeatedly floods why do we expect a different outcome than more claims on the NFIP program that are funded by our tax dollars?
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  • Deserwest 9/11/2017 9:51:25 AM
    The problem with your post is that it lacks any citations to back up your opening assertion that the majority of losses are from homes that experience multiple claims. Over what time period are you talking about. What data is this based on. Starting in 2013, NFIP did impose substantial and re-curring rate hikes on coastal properties along with many map revisions. The reality on the ground is that not every coastal home is owned by a gazillionaire, middle class people live there too. These homes exist, and while many of these homes would not have been built had it not been for subsidized flood insurance rates, this is nothing new. The concept abounds... Under Obama care, the sick are subsidized by the healthy, Fire insurance costs in high fire hazard areas are subsidized by dollars from lower risk areas, bad drivers are allowed to buy insurance when in fact, they should not be able to drive at all. It would be nice if we could simply pull the plug on bad ideas, but to think you can simply do that and walk away is a childish notion. A certain percentage of homeowners who lose their un-insured homes to flood, will simply walk away, accepting a foreclosure that they will never pay for. So, what you called the bottom line is really not the bottom line at all.
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