After Irma, a storm of claims awaits Florida's insurance industry
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As hurricane Irma reaches the coast of Florida Sunday, the ferocious storm might cause damages way beyond what the insurance industry can bear, with costs estimated at around 100 billion dollars.
When Irma descended on Barbuda, enveloping the small island with 300 km/h winds, traders in the United States began frantically dumping shares from the Florida-based insurance company Heritage Insurance Holdings.
Traders weren't sure exactly where Irma would eventually collide with the American coastline, but it would almost certainly be in the Sunshine State, where Heritage gets 55 percent of its revenue and has enormous liabilities.
Though Irma has since settled over Florida’s western coast, avoiding some of the worst-case estimates of damage from a head-on hit with Miami, another uncertainty remains: the ability of Florida’s insurance industry to deal with the eventual flood of claims.
Florida’s property insurance market
When Hurricane Andrew tore through southern Florida in 1992, it caused $26 billion in damage, and left huge changes to Florida’s insurance market in its wake. Heavy losses sent numerous small local insurers into insolvency and convinced national companies to stop offering property coverage in the state. In response, Florida created the Florida Hurricane Catastrophe Fund, to reimburse insurers in the case of a disaster, as well as a state-run insurer of last resort, Citizens Property Insurance Corp, to offer policies to those who couldn’t purchase their own on the open market.
The Catastrophe Fund has a liability limit of 17 billion and as of 2017, enough funds to meet all of its potential obligations. Citizens Property holds 435,000 policies, covering roughly 15 percent of the market in the area surrounding Miami, a sharp decrease from 2011, when it held 1.5 million policies. The shift is largely due to the rise of small, specialist insurance companies, which are now responsible for covering 60 percent of southern Florida’s market.
Though that means Citizens Property which had a surplus of $7.4 billion available to cover claims at the end of 2015 has far less liability than six years ago, it also means that much of the liability has shifted to those smaller companies, like HCI, Universal, and Heritage, whose shares were down 22 percent, 17 percent, and 17 percent, respectively, for the week by market close on Friday, September 8.
Most of those companies have never been faced with a major hurricane, something that worries experts like Shahid Hamid, director of the insurance laboratory at Florida International University’s hurricane research center. In 2015, Florida’s Office of Insurance Regulation conducted a “stress test” to gauge how the state’s insurance industry would respond to “1-in-a-100 year” hurricane, modeling three scenarios, the most severe of which was based on a repetition of the 1947 Fort Lauderdale hurricane and would have caused $17.6 billion in insured losses today.
The regulator concluded that “each insurance company in the Catastrophe Stress Test demonstrated an ability to pay for losses associated with a 1-in-100 year event as well as the capacity to successfully withstand three specific storm scenarios.” However, Irma could cause damage far above and beyond what the stress test modeled.
Federal budget to bare the cost
"Irma will wreak huge costs on private insurance firms", said Eric Lissan, a business professor and former attorney with the US Justice Department, in an interview with FRANCE 24. But he underlined that “the biggest hit will come out of the public budget”, specifically from the federal flood insurance, a part of the Federal Emergency Management Agency (FEMA), whose funding was heavily cut in the Trump Administration’s recent budget proposals.
The expert however warns that “there will be large numbers of people sustaining losses for which there will be no reimbursement.”
Swiss Re, a global insurance firm, recently released analysis of what impact Hurricane Andrew would have had if it had hit Florida in 2017, on its twenty-fifth anniversary. Swiss Re estimated that modern-day insurance costs would be between $80-100 billion, double the hurricane’s initial damage of 45 billion in inflation-adjusted 2017 dollars. Most of the increased costs can be pegged to population growth, the construction boom that has followed, and sea level rises that have already occurred due to climate change.
As retirees and sun-seekers have flocked to Florida’s southern coast, the area around Miami has grown by 35 percent since 1992. Even though building codes were tightened after Andrew, the majority of Southern Florida’s homes were built before 1994, and the recent boom has left dozens of half-constructed towers exposed to hurricane winds they might not be ready to withstand.
As of Friday morning, Enki Research, a disaster modeling firm, forecast that Irma would ravage Florida to the tune of $100 billion. None of the stress tests came anywhere close to evaluating an impact of that size on Florida’s insurance industry, but reality will soon hit as the real stress test takes place.