Hurricane Ida: The biggest nat cat loss since 2017
Hurricane Ida looks likely to become the costliest nat cat event since 2017, with scope for the storm to inflict losses of $20bn-$25bn, as claims from a powerful storm system are amplified by factors including real inflation, demand surge and an adverse litigation environment.
Best-fit tracks from modelers – which are not the modeling firms' official estimates – point to a claims toll in the $15bn-$17bn range, but are believed to heavily understate the likely ultimate extent of the loss.
Aggravating factors include the late-pandemic disruption to supply chains and labor markets, which have pushed building materials and labor costs higher already, and which will be turbocharged by post-event demand surge.
With Louisiana one of the states most heavily impacted by Covid-19, there is scope for further disruption to the event response, slowing both loss adjustment and repairs, and increasing the chance mold will damage buildings.
The huge scale of power outages – reminiscent of Winter Storm Uri – could also amplify the loss and drive costly BI claims.
There is also scope for heavy energy and other major risk losses given the path of the storm, with these set to be a multi-billion dollar swing factor in the losses that will only become clear to the market in the coming weeks, and which would fall disproportionately on London.
There has been a bias in source estimates towards the lower end of the $20bn-$25bn range, with sources at that end – and a couple of middle-to-high teens outliers – relying heavily on the degree to which the strongest winds missed major metropolitan areas.
However, scope remains for this early range to be proven too optimistic. The complex web of secondary factors could inflate the loss beyond this level, and the cat market’s Day 1 view of recent events has consistently underestimated ultimate loss figures – which warrants some scepticism when playing back the market view.
While approaching with winds of 150 mph, the storm had raised the specter of Hurricane Katrina which struck New Orleans exactly 16 years before, and created fears of a massive worst-case scenario.
But there will be no repeat of the ~$50bn industry loss from Katrina, with a smaller storm system this time, a more forgiving track and better risk mitigation making Ida yet another in the string of medium-sized cat losses that have defined recent years.
At $20bn-$25bn (ex-NFIP), the loss will represent an earnings not a capital event, likely explaining the muted stock market response – although combined with the European storms it has the scope to make Q3 results very messy.
With a cat event outside Florida typically said to become a reinsurance event at around $5bn-$7.5bn, and attach UNL retro at around $20bn, the loss will skew to the reinsurance market. The tilt is likely to be heavier in Louisiana than it would be in some other states, with the market share of local/regional writers – that have lower attachment points - higher than average.
And with cedants able to trap up to double the estimated claim due to the buffer loss table formulae, an event of this size could trap significant amounts of retro ILS capital on UNL deals, as well as leaving the remaining agg retro writers highly exposed for the remainder of the year.
Following $42bn of H1 cat losses (Swiss Re estimate), and taking into account the high-single-digit billion Bernd flood loss in continental Europe, Hurricane Ida puts the industry on course to be well above its 10-year average of $79bn and raises prospect of the first $100bn+ year since 2017.
A loss of $20bn or above would make Ida the largest nat cat loss since Hurricane Maria’s ~$35bn impact in 2017, exceeding Typhoons Jebi and Hagibis, and Winter Storm Uri.
Loss estimates have been widely dispersed.
This publication reported on Monday that modeling firms RMS had ballparked the industry total at $17bn, using an average of best-fit tracks for the storm, with the other modeling firms said to be fairly tight with this figure.
None of the client figures are formal loss estimates, with all of the modelling firms undertaking additional post-landfall work on the specific characteristics of the storm before providing an official view of the loss.
As such, they are better taken as directional indications around the rough loss quantum – noting that the official loss estimates typically exceed these figures.
Anna Neely, who leads the catastrophe response team at reinsurance broker TigerRisk, said: “The non-modeled component in this could be relatively high.”
Several cat modeling analysts pointed to an array of factors, including higher losses from falling trees, significant business interruption claims, inflated labor and materials costs, adjusting delays, and the uncertain scope of flood losses as compounding the effects of an historic wind event.
“Models aren't designed for this kind of loss estimation,” Neely said.
One source said: ““The industry estimates below $20bn seem light. I think it would be easy to see this hit $20bn.”
Analysts at Willis Re agreed.
“In terms of industry loss estimates, we think it would be north of $20bn,” said Willis Re’s Prasad Gunturi, who is EVP for catastrophe analytics at the broker and head of model research. He added that the loss figure was excluding anticipated claims to the National Flood Insurance Program (NFIP).
Brian Reid, CEO of AmRisc, the cat-focused MGA owned by Truist pegged industry losses north of $20bn, while noting his company had received 57 claims as of Monday, which he said was high given the power outage.
Another seasoned industry source said that the loss could hit $30bn once the amplification from factors including demand surge, inflation and the Florida-like Louisiana court system was taken into account.
Flood vs wind
Market sources flagged the challenges of estimating the flood component of the loss so early, but most suggested that given the strength of the storm, the wind loss was likely to be the bigger loss driver.
“Because the wind was strong, if there's any doubt whatsoever about whether it's wind or flood, they're going to be tagging their homeowners [insurer],” one source said.
Amrisc’s Reid said of the category four storm: “The level of damage is pretty indiscriminate. It can be fire resistive, it could be new, it could be old, it could be frame - it doesn't really matter. At 140-150mph winds, there's nothing really nothing that's designed for that…unless it’s a bunker,” he said.
“The severity is going to be high.”
Several market participants pointed to the continued intensity of the storm even as it made its way inland as likely to contribute to the event’s loss severity.
“It didn't degrade immediately upon landfall it remained at hurricane strength for well over 12 hours after made landfall,” TigerRisk’s Neely said, noting the unusually high number of weather stations reporting 100 mph gusts. “There were more places that were exposed to some of those gustier outer bands.”
There was broad relief among sources that levees most remained intact, with many saying the damage from storm surge was less than initially feared, and noted that areas where levees failed were less populated.
“I still think you can't drop eight to 10 inches or plus of rain in some of these areas that are already saturated and not have some issues,” said one senior property reinsurance broker. “I think the next 24 hours is when we're going find out more about the flood.”
Amrisc CEO Reid pointed to unique challenges in the region. “New Orleans is a specific area that can only handle about a half an inch of rain per hour,” he said. “If you look at a city like Houston, It's more like 2 inches per hour.”
“A half inch per hour on an event like this is likely going to be an issue for the city of New Orleans,” Reid added.
The distribution of the loss is likely to differ heavily for Ida versus what was seen with Katrina, reflecting shifts in market share as well as the greater proportion of the loss that will remain with primary writers.
The biggest insurers of the catastrophe exposed lines of business we looked at, namely State Farm and Allstate, remained at the top of the pile from 2005 but with much smaller shares of a tighter market.
Many newcomers to the Louisiana market, including UPC Insurance and FedNat, have earned spots in the current top 25 list even though they had no market share in 2005.
These are companies with low-attaching reinsurance programmes that will concern their reinsurers, along with the likes of Lighthouse, Shelter, Southern Fidelity and GeoVera. However, it seems in this case that there is a likelihood most nationwides will attach their programmes, not just those that take smaller net cat bets like Farmers and Allstate.
In order to estimate the reinsurance market share, we looked at the Schedule F reinsurance filings of the largest writers of catastrophe exposed lines in Louisiana. The accuracy of this analysis is limited given that the entity, and the shared reinsurance relationships, are not restricted to Louisiana or the specific lines of business.
In addition, the disclosures are on a lag, missing recent changes in market share and also cannot differentiate between catastrophe premiums ceded and, say, casualty. However, despite those caveats it is the best available proxy.
Tracking back versus 2005, it is also possible to see which reinsurers have increased their shares and which have decreased.
Both Swiss Re and Berkshire Hathaway shrunk significantly, while Munich Re and Alleghany’s TransRe grew substantially.
Recovery slowed by outages
Recovery and claims adjustment efforts stalled after heavy winds and rain took down transmission lines, power poles and other equipment for Entergy, the local power authority, leaving around one million residents without power.
The failure of the energy grid reminded some of the major outages in Texas following Winter Storm Uri, which was said to compound losses from that event.
“First notice of losses are really far from coming in, and people can't get to the claims yet, so it will probably be the end of the week before we actually start getting people to think about what their size of loss might be,” said one reinsurance broking source.
“It's still difficult to get there,” added a senior retail property broking executive. “Things have got to settle. I'd say midweek we'll have a better handle on claims, besides just from verbal [communications]. People will be on the ground [then].”
Michael Stahl, the chief marketing officer at remediation specialist SERVPRO, and a former insurance executive, said the volume of calls his company had received was so far a “fraction” of what it ultimately anticipates, with the number likely to swell in the coming days.
“We’ve had maybe a few hundred [calls] so far, which is low relative to the many thousands we're certain to get,” he said Monday afternoon. Servpro is predicting losses from the storm to exceed those from Hurricane Laura, which hit Lake Charles a year ago.
‘There’ll be massive BI’
Numerous executives expressed concern regarding the power outage, and expected the loss of electricity to add to the claims total.
“Many of our commercial clients have less of a flooding claim scenario and they're more concerned about the lack of power potentially for the next two-to-four weeks,” said Martha Bane, the property practice leader at AJ Gallagher.
“Our clients are just looking for backup generators,” she said. “They have generators that can support their key systems but they can't operate their entire building. That's the challenge right now.”
Bane also suggested flooding from the heavy rainfall and an extended power outage could lead to more significant business interruption claims for insureds that are unable to access their properties.
“That could be pretty devastating to some of the hospitality and restaurant businesses down there.”
As of Monday afternoon, Marsh’s head of property claims in the US Rob Gall said the broker had “not had a lot of direct contact with a lot of clients because they're still getting through assessing what's going on.”
Delays in adjusting claims has the potential to compound their cost, not dissimilar to what unfolded following Uri.
“I would be concerned about mold,” TigerRisk’s Neely said regarding an extended power outage. “More than three days – that's enough to start mold growing.”
She continued: “Companies have gotten better at claims-adjusting and determining source of loss over time, but it may take longer, and it adds to the expense inspecting every single property.”
One senior wholesale property executive said the business interruption component of the loss would be a “big determining factor” for the industry loss total, while others also pointed to surging materials and labor costs, as well as losses inland as the remnants of the storm makes its way to the northeast.
Covid-19 Delta surge ‘a complicating factor’
Ken Tolson, the global president for network solutions at claims adjuster Crawford and Company, said the focus on Monday was getting local response sites “up and running”.
“Because of the power outages, [Monday] will be a slow claim reporting day but power will start coming on,” he said.
Tolson added that the surge in Covid-19 cases in the region was a complicating factor, but that a year and half into the pandemic, the industry has adapted well to adjusting claims.
Covid-19 surges in the state
“We're taking the position that we're going to be living with Covid for a long time, and if we get out of it sooner, great, but it's just a part of our protocols now about how we deploy people and safety protocols.”
Tolson said that the firm expected to deploy its maximum resources to address the predicted wave of claims.
“We're just anxious to get to work so we can start chewing through these claims,” he said. “I would imagine by Wednesday we'll be back into New Orleans.”