Best Comments on Potential Impact of Hurricane Ike on P/C Industry

A.M. Best’s preliminary assessment of the potential financial impact from Hurricane Ike concludes that, even though its passage was a “sizeable catastrophic event, the overall financial impact to both the primary and reinsurance sectors is expected to be generally manageable given the current overall capital strength of the industry.”

In that respect, Ike’s impact is similar to that from Hurricane Gustav, i.e. it “will not be a solvency event from an industry-wide perspective.” However, Best also indicated that it expects Hurricane Ike, as well as the active hurricane season, to “bring additional earnings pressure to the market.”

In addition Best said: ” As events of greater severity typically impact reinsurers, it is anticipated that the competitive reinsurance segment will also incur greater losses as a result of Hurricane Ike’s size and the overall level of insured exposure in the region.

“Given the magnitude of Hurricane Ike, the inevitable comparisons to Hurricane Katrina have already been put forward. As was the case with Katrina, significant storm surge has been associated with this event. Although policy-language issues regarding “wind vs. water” damage have been largely resolved since 2005 and in many cases contractual language clarified, there remains the potential for insurance coverage disputes based on the origins of the water damage.”

According to Best, Ike’s intensity “may provide insight into companies’ various risk management efforts in the post-Hurricane Katrina environment, as in many cases the initiatives implemented after the 2005 events have not been fully tested given the relatively benign 2006 and 2007 hurricane seasons. This may be particularly true for the energy and marine segments.”

Best also indicated that its “rating assessment includes a risk-adjusted view of overall capitalization, which incorporates a reasonably severe event. As catastrophic events already have been factored into the analysis, A.M. Best does not anticipate a significant number of rating actions to be associated with Hurricane Ike. However, companies with significant market share in the region will be evaluated relative to A.M. Best’s previous loss expectations, and any material deviations could lead to negative rating action in the form of under-reviews, outlook revisions or downgrades.”

The companies with exposures to Ike are presently assessing their potential losses, which Best expects wile be presented “within a reasonable timeframe. These loss estimates should also include potential assessments from the Texas Windstorm Insurance Association (TWIA) where appropriate. TWIA currently has approximately $370 million in a Catastrophe Reserve Trust Fund as well as $1.5 billion in reinsurance. Depending on the ultimate loss for TWIA, insurers may face assessments that could impact future operating earnings and capitalization, which will be incorporated into prospective rating analysis.”

In conclusion Best observed: “Events such as Hurricane Ike, the currently active hurricane season and the significant catastrophe losses during the first half of 2008 highlight the importance of prudent underwriting discipline and risk management throughout the pricing cycle. A.M. Best will continue to evaluate the impact of Hurricane Ike in greater detail as additional information becomes available. While there is the potential that some individual ratings could be affected, it is anticipated that the overall financial strength of the industry will not be significantly weakened.”

Source: A.M. Best – www.ambest.com