Latest Storm May Push Total Insured Catastrophe Losses Over $50 Billion

Hurricane Wilma hit Florida after battering Mexico's Yucatan peninsula and resorts for a full day, leaving that country with between $1 billion and $3 billion in insured losses, according to Oakland, Calif.-based Eqecat.

Risk Management Solutions of Newark, Calif., came out with the largest Wilma loss estimate for Florida, ranging from $6 billion to as high as $10 billion.

AIR Worldwide Corp., a Boston-based subsidiary of the Insurance Services Office Inc., put its estimate between $6 billion and $9 billion. Eqecat issued an initial estimate ranging from $2-to-$6 billion, but later raised the figure to between $4 billion and $8 billion.

Eqecat and RMS said their loss estimates included commercial losses, business interruption and "demand surge"–which occurs when the demand for products and services to repair damages significantly exceeds the regional supply.

The catastrophic losses the insurance industry has experienced this year from hurricanes will mean higher rates for homeowners and commercial clients for years to come, according to Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York.

He added that strains from the losses will mean primary insurers have to increase premiums and reexamine their risk appetites in wind-exposed regions. Some insurers, Mr. Hartwig observed, will seek to reduce their exposure. The reluctance of new capital entering the marketplace will mean fewer primary insurers and more policyholders turning to state residual markets for coverage, he added.

Mr. Hartwig estimated that total hurricane losses this year currently stand at $55.7 billion (a figure he called conservative)–almost double last year's record losses of $27.5 billion.

Hurricane Wilma, he added, would clearly make the industry's top-10 list. "While insurers are not expecting to see doubling of loss increases for the next few years, they do see elevated losses for decades to come," he said. "Homeowners, commercial and reinsurance [coverage] will have to be priced to reflect that elevated risk."

The current state residual market system must reassess its pricing policies in the face of this new reality, he pointed out. The markets must no longer bow to political pressure to keep rates low and must raise rates to be actuarially sound. Pricing, he noted, needs to not only cover current losses but build reserves for the future. "The states will have to raise rates more than the private insurers," Mr. Hartwig predicted.

Robert Klein, director for the center of risk management and insurance research at Georgia State University in Atlanta, echoed Mr. Hartwig, saying insurers and regulators, together, must meet and deal with the current hurricane cycle.

"There is the need for a meeting of the minds" among insurers and regulators to establish a financial model that works for insurers but quells political concerns over increased premiums. "Those people [along the Gulf Coast], one way or the other, will pay more for insurance," he observed.

Fitch Ratings said it believes Wilma is a further blow to an already weakened Florida insurance market, which it says has not realized an adequate return on capital since Hurricane Andrew in 1992.

Wilma, Fitch said, could prove to be the third-largest U.S. insured hurricane loss behind Katrina and Andrew if it comes in on the high end of estimates, and the fifth-largest U.S. catastrophe loss ever.

There is little incentive for a well-capitalized insurer to remain in the Florida market, Fitch added, or a start-up to capitalize well there, leaving thinly capitalized insurers in that market. While they will report greater profits, these companies will be less able to survive extreme events, Fitch warned.

This confluence of events, Fitch said, makes the risk of insolvency among the small, Florida-only carriers providing property coverage high.

The current market, Fitch said, also serves as a disincentive for smaller companies to grow.

According to Florida authorities, six new companies entered the Florida property-casualty market this year–most assuming business from Citizens Property Insurance Corp., the state's insurer of last resort.

Wilma is not expected to be a rating event for companies, Fitch noted. The rating agency reinforced its discomfort with the Florida market when it downgraded Citizens, lowering its long-term issuer and senior debt ratings to "A-minus" from "A," with a negative outlook. Fitch said while the fund has ample claims-paying resources, its concern with the quality of the Florida insurance market–from which Citizens levies assessments to cover deficiencies–could deteriorate.

Fitch did downgrade XL Capital's financial strength rating from "double-A" to "double-A-minus." The change was attributed to catastrophe losses and adverse loss reserves over the past several years.

Another question in the aftermath of Katrina, Rita and Wilma is whether there are enough claims adjusters. The Property Casualty Insurers Association of America, based in Des Plaines, Ill., said insurers are confident they have enough adjusters in Florida to deal with claims arising from Hurricane Wilma.

"The four storms that hit Florida within six weeks last year provided the industry with experience in responding to consecutive major hurricanes, and insurers are well prepared for this situation," according to PCI.

"We're finding we have them, but a lot of adjusters are working in other states," said Sam Miller, executive vice president of the Florida Insurance Council, as Wilma approached. He said some insurers were "scrounging for adjusters," but added that "there are plenty of adjusters–we're lining them up. A lot have just finished up in the Gulf States and have come home. They probably weren't expecting to get back to work this soon."

Taking early action, Florida's chief financial officer, Tom Gallagher, issued an emergency rule capping public adjuster fees at 10 percent of any claim payment and began deploying mobile units in the state to help consumers as Wilma approached.

The emergency regulation, similar to rules he issued last year, also gives consumers up to 14 days to rescind a contract with a public adjuster without penalty. Under the rule, public adjusters cannot demand compensation prior to the settlement of the claim.

Outside of Wilma, the industry was still reacting to the totality of the hurricane season. In a survey of corporate insurance buyers, the third quarter saw lower premiums paid overall, but property renewals following the devastation of Hurricanes Katrina and Rita are up as much as 20 percent.

The Risk and Insurance Management Society's "Benchmark Survey" found the bulk of renewals reported had been secured before the hurricanes impacted the market.

On a positive note, Warren, N.J.-based Chubb last week entered into a strategic agreement with a private equity firm, Stone Point Capital LLC, of Greenwich, Conn., to launch a Bermuda-based reinsurer with $1.5 billion of initial capital–one of two reinsurance deals involving the island last week. Chubb said it saw an opportunity in the wake of hurricane losses that have shaken the reinsurance market.

Wilma barreled into the southern Gulf Coast of Florida around 6:30 a.m. on Oct. 24 as a Category 3 storm on the Saffir-Simpson scale, with estimated sustained wind speeds of 125 miles per hour.

Wilma was the 21st of a record 23 named storms, a record according to the National Weather Service. Wilma was also the eighth hurricane to hit Florida in 14 months.

After the storm passed, between 2.2 million and 2.5 million homes were without power, and the Bush administration declared 20 Florida counties disaster areas. Millions were still without power as this story went to press, and it could be weeks before power will be fully restored.

Additional reporting by Daniel Hays and Caroline McDonald.

Wilma could prove to be the third-largest U.S. insured hurricane loss behind Katrina and Andrew if it comes in on the high end of estimates, and the fifth-largest U.S. catastrophe loss ever, noted Fitch Ratings.

"While insurers are not expecting to see doubling of loss increases for the next few years, they do see elevated losses for decades to come. Homeowners, commercial and reinsurance [coverage] will have to be priced to reflect that elevated risk."

Robert P. Hartwig, Chief Economist

Insurance Information Institute