Early Idalia commentary shows wide range of “manageable” industry losses

Insured losses from Hurricane Idalia do not look like hitting the levels that were feared as it approached Florida, with post-landfall commentary generally suggesting a sub-$10bn or even a sub-$5bn event that will mostly be covered by insurers rather than reinsurers.

  • Range of potential insured losses lower than was suggested as Idalia approached Florida
  • Estimates released after Idalia made landfall range from $3bn to low double digit billions
  • Storm ultimately made landfall in sparsely populated area with relatively compact wind field
  • Not seen as significant reinsurance event with losses expected “below most carrier cat programs”
  • Idalia could further pressure Florida’s personal property insurance marketplace
  • Minimal cat bond market impact expected, although adds to erosion of aggregate structures

Some industry observers have been quick to release their views on how the industry will be impacted by Idalia, which made landfall in the Big Bend region of northwest Florida on Wednesday morning.

BMS senior meteorologist Andrew Siffert in an update on Thursday said: “In reality, the insurance industry dodged a bullet as Idalia tracked over relatively rural areas with low population density.”

He said that insured losses “ should still end up in the $3bn to $5bn range for the insurance industry”.

Siffert said the industry was lucky because of the lack of adjacent coastal exposure where Idalia struck as well as the storm weakening as the result of the eyewall replacement cycle that happened around landfall and a bit of dry air entrainment just before landfall.

This followed Gallagher Re on Wednesday after Idalia made landfall stating that it anticipates Idalia will result in a “low to mid-single-digit” billion dollar loss for the industry, including expected payouts from the National Flood Insurance Program (NFIP).

In a social media post on Thursday, Gallagher Re chief science officer Steve Bowen said: “Simply put, this was an event that could have been a lot worse.”

He added that Idalia “should largely be a negligible event beyond another landfall data point during the next reinsurance renewal cycle.”

Shortly after Idalia’s landfall, Keefe Bruyette & Woods equity analyst Meyer Shields commented that Idalia’s insured losses “are likely to be well below $10bn”, adding that this size of loss is “very manageable” for the industry.

Also on Wednesday, Paul Kneuer, managing director at insurance strategic advisory and investment banking firm Stonybrook Capital, commented “this feels like ~5B”.

A slight outlier to this seeming consensus of an industry loss well below $10bn came from insurance investment manager Twelve Capital, which on Thursday said that the indications are that the industry loss from Idalia will be “in the high single digit to low double digit” billion dollar range.

In addition, Moody’s RMS after Idalia made landfall sent clients a preliminary stochastic events STEP tool output that includes a mean wind-only industry loss of $6.28bn.

This stochastic event selection does not represent the Moody’s RMS view of the industry loss for Idalia and should not be interpreted as such, with an official loss estimate set to be released 7-14 days following landfall.

The distribution on the latest Moody’s RMS output indicates a 90 percent exceedance probability (EP) of a $264mn loss, ranging to a 50 percent EP for a $3.26bn loss and just a 10 percent EP for an $15.89bn loss.

Loss expectations reduced from before landfall

What is clear is that the range of potential insured losses is lower than it was compared to the forecast for Idalia a few days out from landfall.

An example of this is that the Moody’s RMS $6.28bn mean wind loss output released following landfall was lower than the $7.20bn figure released to clients on Tuesday as Idalia approached Florida, which itself was down significantly from the $9.36bn mean output released on Monday based on the forecast at that time.

The $3bn to $5bn loss estimate from BMS’s Siffert is down from the range of $3bn to $6bn that he suggested the day before landfall and reiterated on Wednesday.

In an update released on Wednesday, the executive said that Idalia’s wind swath will be narrow and extreme damage will be limited to a small area. He added that live chaser videos “do not show a lot of significant damage in the landfall areas”.

Siffert said that “the wildcard” that could equate to more considerable industry losses would be wind losses in the highly-populated Tallahassee area, but suggested that the relatively compact wind field should limit losses.

In addition, he noted that the areas expected to experience the highest storm surge are sparsely populated.

Stonybrook’s Kneuer highlighted that Idalia came ashore as a Category 3 “but in what looks like the single most deserted part of Florida”. He said that Tallahassee and Clearwater both probably only saw tropical storm force winds.

Kneuer added that it sounds like there was a big surge around Tampa Bay, which even if there is not wind damage “will cost on autos, fine arts, event cancellation and such”.

Gallagher Re noted that the initial impacts from Idalia were widespread and included damage to property, vehicles, and infrastructure. It added that another factor in losses will be that Florida is currently dealing with some of the highest inflation in the country.

The broker said that blocked and closed roadways, flooded homes and businesses, downed trees and power lines and water rescues were common across the most affected communities of northern Florida and southern Georgia.

An extreme storm surge in the coastal Big Bend region inundated numerous properties and swept away boats.

At midday on 30 August more than 275,000 customers in Florida and 110,000 in Georgia were without electricity.

Stonybrook’s Kneuer noted that nearly 400,000 people being without power often translates into a PCS loss of under $4bn, but that PCS excludes marine and other lines as well as allocated loss adjustment expenses.

A largely retained loss

The initial expectation is that insurers will bear the brunt of losses because the event will not be large enough to trigger big reinsurance payouts, with the exception of low-attaching covers for any domestic carriers with a higher concentration in the area impacted.

“With higher named storm deductibles, some losses might fall on policyholders,” commented BMS’s Siffert. “Overall losses should be below most carrier cat programs, so this will not be a reinsurance event as insurance companies retain the losses.”

KBW’s Shields said that an industry loss well below $10bn “implies that primary insurers – rather than reinsurers – will bear most of the losses.”

The analyst expects Idalia’s losses “to sustain primary insurers’ collective reinsurance demand and the reinsurers’ underwriting resolve”. He noted the losses follow the elevated weather-related losses in the first half as well as from the Maui wildfires this month.

Shields said Idalia will “further pressure Florida’s personal property insurance marketplace, which relies disproportionately on smaller insurers.”

Gallagher Re’s Bowen noted that a lot of focus continues to be on the Florida insurance market, “and while this certainly will not help with ongoing challenges facing the industry, it's not likely to add too much additional widespread market pressure.”

Idalia will lead to losses for both the NFIP and Florida state-backed insurer Citizens.

Gallagher Re said that most claims to the NFIP will likely come from the Tampa area given a higher volume of active policies in place there compared to the Big Bend region.

BMS’s Siffert said flood insurance has a low take-up rate across the path of Idalia, with inland counties seeing less than 5 percent take-up, while some coastal counties and southeast counties have 25 percent.

Citizens is one of the largest insurers in Florida, with its policies in force ballooning in recent years amid a crisis in the Sunshine State’s homeowners insurance market in recent years.

Gallagher Re noted that there has been some market improvement this year following reforms but challenges remain regarding the number of active carriers.

“There have been commitments by new or existing carriers to absorb some policies currently tied to Citizens, but as of June 30, 2023, there were 1.32 million active policies in place,” the broker said.

However, Gallagher Re also noted that Idalia came ashore in a part of the state where Citizens has among its fewest active policies in force and relatively low total insured exposure as compared to central and southern portions of the state.

Idalia does not look like being a big event for the ILS market.

Twelve Capital said that it does not expect any direct impact from Idalia on its cat bond positions, although the event will add to the erosion of aggregate structures.

This echoed commentary form ILS manager Plenum Investment the day before Idalia made landfall that there would only be “marginal if any losses” to a limited number of cat bonds.

Gallagher Re noted that the slight weakening of Idalia’s peak winds from a low-end Category 4 to a high-end Category 3 prior to landfall is unlikely to cause a significant difference in the ground-up industry loss.

“However, the category downgrade could potentially affect written parametric reinsurance triggers,” the broker said.