Last week there were multiple named tropical systems in the Atlantic Ocean in addition to four others in the Pacific Ocean. Florence of course generated most of the attention here in the United States and will continue to be in the news as the true destruction is sorted out.
We will most likely see losses in the billions for Florence with the amount of insured losses also in the billions. Insured losses are the dollars paid by insurance companies for covered claims, whereas the headline loss number will be the total loss which is not all insured. Insured losses will often not include indirect losses such as lost wages and delays, but some of these losses can be covered by insurance. What will this mean for the insurance market?
If the past is any indication we will most likely see carriers try to increase rates and the insured that are renewing coverage within the next 45-90 days will see the largest impacts of this increase. This is what we saw last year when multiple hurricanes hit the United States. These rate increases ended up not holding up over time. Insurance companies were saying to investors and analysts that the hurricane losses were “earnings events” and would not have a material impact over the long term. On the other hand, they were telling insureds and brokers they needed to increase the premium or rate because of these same losses. Insurance companies essentially used the storms to increase rates but told the analysts that cover their stocks that the losses were just a blip on the radar. I remember underwriters asking for rate increases up to 40% in the immediate aftermath of these storms.
Rates returned to normal because there is so much surplus money in the insurance market and competition is fierce. After the 2008 recession a lot of money flowed into the reinsurance sector where investors could secure a better return on money compared to US Bonds and this continues to be the case. Couple the money that flowed into reinsurance with the stellar returns in the equity markets during this time and you now find insurance industry surplus near all-time highs despite pretty hefty losses the past few years (think hurricanes, earthquakes, CA wildfires, etc.). That is why if your policy renewed in April you probably saw no increase or at worst a minimal increase.
Over time these losses add up and could weaken the market and lower total surplus. My personal belief is that as interest rates continue to increase you will also see some of the money move back into US Bonds. Investors that traditionally did not invest in insurance but only started after 2008 will begin to exit the insurance market and invest in US Bonds where they can get a similar return with less risk. If we see move money move out of insurance and into bonds, with losses continuing to mount, the property insurance market will at some point be impacted but that could still be a long way away. If your property insurance renews in the next 45-90 days I suggest you ask your broker why insurance company CFOs and CEOs are saying these storms are just “earnings events” but then increasing your rates.