Combined losses for the U.S. property and casualty insurance industry from the four hurricanes that have hit the United State so far this year are now in the low US$20 billion range says Standard & Poor’s Ratings Services.

The insured loss estimates for the latest storm, Hurricane Jeanne, appear to be averaging about US$7 billion, S&P says. “These, combined with the estimated insured losses from the three earlier storms, would give a total insured loss from all hurricanes this season in the low $20 billions,” it says. “In real terms, this approaches the loss from Hurricane Andrew in 1992.”

However, Standard & Poor’s reports that it does not have concerns about the solvency of any of the P&C insurers it rates interactively. “Certainly, most companies’ earnings will be adversely affected by the storms, with anywhere from one quarter’s to one year’s earnings being absorbed by the losses,” said S&P credit analyst Thomas Upton. “Companies’ longer-term financial strength could eventually be diminished by the consequences of the storms, necessitating changes in their assigned ratings, but Standard & Poor’s expects that these changes will be modest and will be exceptions rather than the rule.”

The rating agency says that companies have withstood the effects of this series of storms without major adverse consequences for their financial strength for two reasons. First, the state-sponsored Florida Hurricane Catastrophe Fund has proven to be quite resilient in its ability to absorb a large part of the insured losses. Second, individual companies — both primary writers and reinsurers — have become much more adept at catastrophe risk management than they were in the early 1990s.

Nevertheless, Standard & Poor’s says it believes that the consolidated magnitude of this series of storms is such that there will be issues that the industry and its regulators will have to deal with soon:

  • companies might find that the sheer number of claims arising out of these storms, sometimes with multiple claims on individual properties, will test the capacity of the industry to manage this aspect of its business;
  • reinsurers could revisit the frequency assumptions built into the models that they use to forecast property losses;
  • firms might choose to follow the examples of State Farm and Allstate, creating separate Florida subsidiaries to segregate the risk of hurricanes from the rest of their business; and
  • regulators may have to deal with the fact that part of companies’ risk-management strategy against high frequency events was to levy relatively high deductibles on property losses, essentially transferring the risk to the policyholder.