In a new commentary, AM Best warns that Hurricane Milton poses a significant threat to the Florida-concentrated property insurers that lack diversification.
AM Best believes that diversified, large insurers and reinsurers would be able to absorb losses from Hurricane Milton, depending on the intensity, location and magnitude of the hurricane; however, property insurers concentrated in Florida could experience a significant loss of surplus.
The back-to-back punches from hurricanes Helene and Milton, for the Florida-concentrated group of insurers will have a compounding impact, depending on the losses experienced by insurers and their reinsurance programs.
“Debris from Hurricane Helene that has not been secured or disposed up of could become airborne once Hurricane Milton makes landfall, exacerbating potential property losses,” said Christopher Graham, Senior Industry Analyst, AM Best.
AM Best predicts that losses from Helene in the affected states, coupled with the potential damage due to Milton, could potentially breach the reinsurance program towers Federal Emergency Management Agency (FEMA) secured for the National Flood Insurance Program (NFIP), along with coverage from in-force catastrophe bonds.
The anticipated landfall in the Tampa area, a more populated area than the Big Bend area where Helene made landfall, had led AM Best to believe that the NFIP would face an event of significant claims, which could have been one of its biggest-ever losses.
The NFIP could have claim over $1.9 billion in reinsurance in 2024, although for the program to do so, losses for a single named storm would have to reach $7 billion for traditional reinsurance, $6 billion for the 2021 and 2022 catastrophe bonds, $7 billion for the 2023 catastrophe bond, and $8 billion for the 2024 catastrophe bond.
With Milton having made landfall in Siesta Key, Sarasota, south of Tampa Bay, as a Category 3 hurricane, the worst case storm surge scenarios have not occurred.
Moving over to market conditions, the tightening reinsurance market, possible local insolvencies and declining capital among insurers concentrated in Florida will significantly pressure the state’s property insurance market.
AM Best added: “Hurricane Milton will likely stall any softening of price and terms in the property reinsurance market but will not likely result in increased hardening. With no chance of softening property reinsurance on the horizon, and potential capital losses stemming from Hurricane Milton, some insurers may find it difficult to adequately support their current exposure levels.”
Citizens Property Insurance Corporation has been making concerted efforts to shed policies to private insurers. However, any cutback in capacity among other insurers will only add to the number of property owners covered by Citizens.
Other affected lines of businesses include personal auto, given the potential storm surge and flooding. Milton could also dampen the issuance and returns in the insurance-linked securities (ILS) and the catastrophe bond market, which have been having a profitable year, with the return on the Swiss Re cat bond index up 13% through September.
An outsized loss could trigger various cat bonds and insurance-linked securities (ILS) structures, likely decreasing investor appetites and reducing capacity. Many reinsurers rely on ILS for retrocession capacity, so a lessened appetite could also affect their willingness and ability to offer coverage to primary insurers.
Depending on the level of losses caused by storm surge or rainfall, as opposed to wind, the federal flood program’s cat bonds issued by FloodSmart Re may be under threat.
Meanwhile, the upcoming January 1 renewals for property reinsurance programs could be more problematic for primary insurers because of the effects of the fall 2024 hurricanes.
Chris Draghi, Associate Director, AM Best, added: “The heavy losses will trigger many property catastrophe reinsurance treaties, coming just as reinsurance renewals are being priced for 2025. The upcoming January 1 renewals for property reinsurance programs could be more problematic for primary insurers because of the effects of these recent hurricanes.”
Analysts at RBC Capital Markets have already noted that Milton threatens tens of billions in insured losses with reinsurers also to be impacted.
