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Moody's: Hurricane Irene Not a Threat to P&C Insurers' Capital; Unique Characteristics Complicate Loss Assessment

Posted on 07 Sep 2011

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Hurricane Irene is not expected to be a major capital event for the US P&C industry, Moody's Investors Service says in a new report, though losses from the hurricane will pressure earnings that have already been weakened by higher-than-usual winter storm and tornado losses in the first two quarters of the year.

"Although wind speeds and hurricane intensity were less than initially expected, a number of unique characteristics, such as the high levels of inland flooding, extensive power outages, and the very wide dispersion of the storm combine to create a high degree of uncertainty in terms of early loss estimates," says Vice President and author of the report Paul Bauer. "And because of these unusual factors, we suspect that as insurance claims are filed in the coming weeks, some surprises may be in store."

But while the volume of claims is likely to be high in comparison to a typical hurricane, claim amounts likely will be low, Bauer says. "Rather than direct severe damage from wind, we expect high levels of damage from such things as fallen trees, as well as minor structural damage."

Higher than usual automobile-related losses due to flooding, and high losses on both homeowners' and commercial insurance policies from power outages, are also expected. Bauer notes that widespread power outages caused numerous sump pump failures, in turn leading to water damage. A further complicating factor is that losses are likely to be unusually high in communities in mountainous areas that have been affected by heavy rains.

"Given Hurricane Irene's unusual characteristics, we believe modeled loss estimates will continue to vary widely, at least in the short term," Bauer says.

"However, once companies begin to report their own internal estimates based on more accurate claims data, we expect that the hurricane will not prove to be a major capital or credit event for the P&C industry." In addition, Moody's does not believe that losses will trigger reinsurance coverages, making this an insurance, rather than a reinsurance, event.

Bauer also notes that that with only small changes in its track and wind speed, Irene could have had much more severe consequences than what appears to have been the case. "The close call of a moderate catastrophe should help support pricing discipline for P&C insurers," he says, adding that the expected losses and disruptions associated with even a weak hurricane are a dramatic reminder that Mid- and North-Atlantic hurricanes remain a significant risk for the US P&C industry.