The impact of Hurricane Ian on Lloyd’s

A very expensive storm

According to AON’s 3Q22 global catastrophe recap, insured losses in 2022 are likely to exceed US$100bn for the third year in a row. This prediction is, however, highly dependent upon the eventual cost of Hurricane Ian, which will undoubtedly be the costliest single weather event of the year – and potentially one of the costliest insured loss events in history.

The current industry insured loss estimates for Hurricane Ian are in a wide range of US$42-75bn, with the true figure unlikely to be known for many months.

The path of Hurricane Ian

Having crossed the western tip of Cuba as a category 4 hurricane, Ian initially made US landfall on the west coast of Florida on 28th September at Cayo Costa, with winds of up to 150mph i.e. still a category 4 hurricane. The hurricane force winds spread across a front of c45 miles, with tropical storm strength winds across a front of c175 miles. As well as devastating winds, Ian brought with it a significant storm surge (with peak waves of up to 52 feet in height) upon the Floridian west coast and produced very heavy rain (of up to 21 inches), causing extensive flooding for much of the state.

Ian then, over an 18-hour period, slowly crossed central and northeast Florida, weakened to a tropical storm and moved back into the Atlantic. In the worst affected areas of Florida, homes and businesses were completely destroyed, whilst widespread power outages were reported to have affected more than 5 million properties. More than 140 people were reported to have lost their lives in Florida, making it the deadliest hurricane to hit the state since 1935.

Having regained some strength, it then made a second US landfall near Georgetown, South Carolina, on 30th September as a category 1 hurricane, with at least 4 more hurricane-related deaths in the Carolinas. Despite dissipating over the Appalachians, remnants of Ian brought further storm surges, high winds and heavy rain to parts of the mid-Atlantic states of the United States.

The devastating impact of Ian was very widespread

This included:

• Disruption of offshore energy assets in the Gulf of Mexico (oil and gas platforms were temporarily closed and personnel were evacuated);
• Supply chains and travel networks were hampered by the closure of airports, ports, rail networks and roads & bridges in Florida and the Carolinas;
• A significant impact on the US citrus industry, as well as the broader agricultural sector;
• Widespread damage to the power networks of Florida and power outages across the south-eastern seaboard of the US, as well as a disruption to the supply of drinking water in Florida;
• Extensive damage to tens of thousands of homes, hotels and hospitality venues;
• The evacuation of thousands of medical, assisted living and nursing home facilities; and
• Considerable losses due to the damage or destruction of pleasure boats and motor vehicles.

Lloyd’s loss estimate

Lloyd’s initial loss estimate for Hurricane Ian, provided on 18th November, is US$2.3-3.0bn, representing a 3-5% market share of the losses based upon a mid-range industry loss estimate of cUS$66bn. The Insider reports that historically the mean market share of recent major north American hurricanes is 6.5% ranging between 3.4% for Hurricane Maria in 2017 and 14.8% for Hurricane Dorian in 2019.

So what, potentially, makes Ian different to its predecessors?

Firstly, the wording of underlying insurance policies will be critical with regards to loss adjustment, given that those impacted suffered varying degrees of wind, freshwater flood and seawater inundation damage – all of which have different levels of reinsurance cover at Lloyd’s. In addition, the losses from the hurricane will be influenced by several other factors including: (i) the Florida Hurricane Catastrophe Fund (FHCF, Florida’s state backed reinsurance fund); (ii) the National Flood Insurance Program (NFIP, a Federal scheme administered by the Federal Emergency Management Agency); and (iii) individual insurers’ own loss adjusted expenses (LAEs).

Potentially critical to Lloyd’s will be the fact that (i) the hurricane initially struck the western coast of Florida, rather than the east coast, where Lloyd’s has traditionally had a bigger footprint; and (ii) Ian seemingly had a much greater impact for homeowners and motorists, rather than commercial property owners, again potentially reducing the exposure of Lloyd’s to the losses.

It is also undoubtedly true that, after a period of rate weakness in property treaty and retro, Lloyd’s has significantly reduced its exposure to the US cat market, particularly in Florida which was both poorly rated and heavily loss affected.

A comparison with Ida

The total of the initial net loss estimates across Alpha supported syndicates for Hurricane Ian is c£680m (or c8% of capacity), which compares to a total initial net loss estimate across these syndicates for Hurricane Ida, which made landfall as a category 4 hurricane in Louisiana on 26th August 2021, of c£549m (c6% of capacity, split 5% on the 2021 year of account and 1% on the 2020 year of account).

This Ida number is adjusted for FX movements, to reflect the GBPUSD rate of 1.21 used for the Ian estimates, but not for inflation. What we cannot know is the extent to which loss estimates incorporate the higher inflationary environment in 2022 vs. 2021 – but we would assume that this is the case for all syndicates given the prudence within Lloyd’s regarding inflationary pressures and goes a long way to explaining the higher values. The Ida forecast is now £568m i.e. there has been little movement in the subsequent 12 months since Ida.

Catastrophe budgets

Despite AON’s prediction that insured losses in 2022 are likely to exceed US$100bn for the third year in a row, many of the Lloyd’s syndicates supported by Alpha members have had limited exposure to some of (but by no means all of) the worst weather-related losses in the year, including the European windstorms, Australian floods, global droughts and some US convective storms. In addition, despite the size and severity of Hurricane Ian, 2022 saw only one major hurricane wreaking havoc on the mainland of the US, which was a significant blessing given its size.

As a result, many of the syndicates that we have spoken to regarding the Atlantic hurricane season are hopeful that their Ian losses will fall within their catastrophe budgets for 2022, albeit exhausting this budget in most cases.

Alpha comment

Given the size and destructive nature of Hurricane Ian, Alpha believes that the event will undoubtedly negatively impact member forecasts for the 2021 and 2022 years of account, but that Ian should have only a dampening effect rather than severely reducing underwriting returns.

Additionally, Alpha has been consistent in its view for some time now that reinsurance rates in the US were insufficient for the risk exposure being assumed. Hurricane Ian seems to have been the ‘straw that finally broke the camel’s back’ in this regard and has combined with some other factors seen recently (previous natural catastrophe losses, inflation, a higher cost of capital, etc.) to produce a significantly harder market and what many believe is the best underwriting conditions for decades.

We are aware of the market commentary around very difficult 1/1 reinsurance renewal negotiations post-Ian and believe that ultimately this will drive reinsurance rates higher which is good for our members.