S&P, Best: Gustav’s Impact Minimal – But Storm Losses are Cumulative

Both Standard & Poor’s Ratings Services and A.M. Best have issued statements following the passage of Hurricane Gustav, which indicate that the storm’s impact on the industry will not be nearly as severe as many had feared.

S&P said that from preliminary reports it’s estimated that “insured losses from Gustav will likely be $3 billion-$6 billion onshore and $1 billion-$4 billion offshore.” S&P said that at this point it doesn’t “believe that the magnitude of this event is such that there will be much influence on the creditworthiness of the industry as a whole, and few, if any, rating changes will result.”

Best reached a similar conclusion, indicating that it “does not expect the impact of Gustav alone to change the current competitive dynamics facing insurers and reinsurers. Although the losses are considerable in comparison to the overall premiums collected for the coverage of the losses incurred, the insurance and reinsurance markets overall are expected to remain competitive.”

However, both rating agencies pointed out that while Gustav alone is unlikely to create problems for the industry, it should be viewed as part of a continuing succession of catastrophic events, which could do so.

S&P noted that “Gustav is just the latest–and the most severe–catastrophe in a year of an unusually high frequency of modest-sized catastrophes (and large individual commercial claims). This has been a contributing factor in the revision of the outlooks on some companies, reflecting adverse turns in their performance as a result of an accumulation of exposures to these modest catastrophes. It is possible that further accumulated losses from small catastrophes–or a substantial loss from one of the currently developing tropical storms–could have a more material adverse effect on ratings.”

Best expressed its concern that “projected losses from Gustav will continue to put pressure on the huge differential between affordable and actuarially sound primary insurance prices in hurricane exposed regions.

“Despite the fact that Gustav turned out to be a relatively moderate storm when put into historical context, a $4 billion on-shore incurred loss reflects approximately 100 percent of 2007 property catastrophe exposed premiums in Louisiana,” Best said. “The impact on reinsurance costs in the Gulf region is not expected to be significant, but the actual impact will play out over the next few months.”

S&P indicated that, if there were further cumulative losses “the effects would be more pronounced on primary companies and less on reinsurers because of the generally greater retention of property risk by primary companies over the last year or so. This will be especially true if the year’s pattern of greater frequency and less severity of catastrophes continues.”

In Best’s opinion future events are quite likely, as evidenced by Hanna, Ike and Josephine, all currently active in the Atlantic. Best observed that the “increase in the number of smaller hurricanes making land-fall, combined with an already high level of catastrophe losses reported in the first half of 2008, would likely bring a dose of reality to the competitive property cat markets and stem further declines in pricing in 2009.” As a result the rating agency indicated that “reinsurers are again recognizing that the potential for loss cannot be ignored and the competitive confidence of some underwriters will wane.”

Best concluded that it “does not expect Gustav to be a solvency event.” However, Best also indicated that it would evaluate “those companies that have a meaningful Louisiana property and Gulf marine market share” to determine the extent of the loss relative to Best’s loss expectations. This will include an “analysis and the impact on their financial strength. Often events like Gustav raise more issues relating to risk management capabilities than solvency concerns.”

Sources: Standard & Poor’s – www.standardandpoors.com and A.M. Best – www.ambest.com