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Here is the scorecard: Three Class 4 hurricanes struck U.S. territory in the third quarter. Worldwide, there were other tropical storm, flooding and wildfire events, three earthquakes in Mexico, and as this is written large parts of northern California are ablaze (bad news for those who like fine wine), inflicting more economic damage, often in places ill-equipped to deal with it. Taken together, 2017 will potentially rank as one of the worst years ever for natural disaster losses.
So, what are the chances all these events will translate into higher insurance costs? When you read about the amount of damage resulting from these events in general news sources, what they are usually referring to is economic damage, the total dollar impact on people and economic activity from an event. Economic losses from these events are certainly severe, but they don’t automatically translate into insurance claims, and its insurance claims that drive insurance costs.
Consider: in order of magnitude of economic damage, of the three hurricanes Harvey in Texas was probably the worst, followed by Maria in Puerto Rico and then Irma, mostly in Florida. But most of Harvey’s damage in Texas was flood related; flood losses to property other than motor vehicles are mostly covered, if at all, by the federal flood program, not insurance companies. Much of the damage inflicted by Maria in Puerto Rico was wind related and thus potentially covered by insurance, but many of the storm’s victims, especially in poorer areas, did not have insurance. Irma looks like it will turn out to be the most expensive of the three storms from an insurance claim perspective; it was mostly a wind event and thus covered by most insurance policies, and it struck a built up area of southwest Florida, resulting in lots of claims. And of course standard fire insurance will respond to California wildfire losses.
This pattern repeats all over the world, with much of the damage from natural catastrophes either not insured or insurable (flood and earthquake) or occurring in countries or locations where many people just don’t carry insurance. Natural catastrophes may make a lot of headlines and affect many people, but each event must be scrutinized individually to understand the actual insurance impact.
Even so, the financial impact on insurance and reinsurance companies from our U.S. hurricanes and wildfires will be sizeable. At the moment there don’t really seem to be any two overall loss estimates that are the same, but the numbers all have one thing in common, they are big.
So, what does all this mean to you? Insured losses are spread out throughout the insurance industry, with reinsurers feeling much of the impact. The industry has plenty of capital to handle the losses. Moody’s reports that losses from our three U.S. hurricanes alone will likely be an earnings event for most insurers, while causing only modest capital depletion for some reinsurers. Nevertheless, industry news sources are already predicting premium increases in the near term. If this proves to be the case, any increases will likely prove to be small (single digits), and will start to be seen with January renewals. In short, probably not much to be overly concerned about.
There is another important lesson to be drawn from these recent events. Lots of money is needed to recover from them. Absent insurance, government funds are predominantly directed to repairing roads, bridges, power grids and other infrastructure. Any financial aid that reaches individuals or companies comes from government grants and loans, or non-governmental organizations and charities. Funds from these sources tend to be in much smaller amounts, require lots of paperwork, come with strings attached and take a long time to get to where they are needed. For events not covered by insurance, recovery is complicated, and slow.
Insurance companies, on the other hand, are often underappreciated but are nevertheless excellent sources of copious amounts of money, delivered in large chunks, quickly, and directly to affected individuals and organizations who need the funds the most after an event. Folks impacted by uninsured events fare less well, but where insurance companies are supplying funds, recovery tends to be much quicker and less stressful. When it comes to sources of money to pay for restoration after an event, insurance will always be far and away the best option.