Hurricane Ida - some early thoughts
Hurricane Ida struck the coast of Louisiana on Sunday 29 August as a category four hurricane, with sustained windspeeds of 150mph (240km/h). This makes it the fifth most intense storm in history to make landfall on the USA mainland. The storm intensified as it approached land, although presented a relatively narrow windfield, with the most damaging winds in a radius of 15 miles. Slower, albeit still damaging hurricane strength (greater than 74mph/ 120 km/h) winds, extended to 45 miles of the eye, while there were tropical storm strength gusts (from 40mph to 74mph) up to 135 miles away from the storm’s epicentre. Along with the destruction wrought by the winds, the storm was accompanied by a storm surge that reached 12 to 16 feet (365cm to 488cm), once again with smaller impacts further away from the storm’s centre.
Although only one death has been reported to date, more than 1,000,000 people are reported to be without power, with emergency forces mobilised to support the rescue efforts including restoration of power. The storm’s path is close to that of Hurricane Katrina; Ida struck on the sixteenth anniversary of the storm which became the most expensive ever for the insurance industry in 2005. However with Hurricane Ida, New Orleans was spared the worst winds and the levee system, upgraded in the aftermath of Hurricane Katrina, has so far prevented the inundation of large parts of the city.
There is a small industry in the estimation of the magnitude of events for insurers, both before and after a storm of this nature makes landfall. In practice, the actual impact will take many months to be finalised. However, the insured loss estimate is an easy shorthand for the scale of the event to the insurance market. Hurricane Katrina, which remains the most expensive natural catastrophe of its type (although surpassed by the losses arising out of the Covid-19 pandemic) had an estimated cost to insurers of $41 billion in 2005 ($57 billion in 2021 values). Early estimates for the cost of Hurricane Ida to insurers and reinsurers currently have a consensus of around $25 billion. There is a lot of volatility around this number, with the events still unfolding. An increasing length of time that homeowners and businesses remain without power will increase the loss, whilst the need for Covid- security in the rescue and recovery efforts is another factor, as is the increasing cost of raw material including lumber.
Hurricane Ida is the second significant catastrophe event for the Lloyd’s market so far this year. Although some syndicates have reported losses arising out of flooding in Central and Western Europe in July, these will be relatively limited for Lloyd’s syndicates, as are the costs to syndicates arising out of the grounding of the container ship Ever Given in the Suez canal in March and the earthquake in Haiti in August. The wildfires in California and Greece have not impacted major conurbations at this stage. However, the severe winter freeze in Texas (also known as Storm Uri) has produced some sizeable losses to the market, with an overall estimated insured loss in excess of $12 billion.
In 2020, the USA was hit by a series of hurricanes and tropical storms, including Isaias, Laura, Sally, Zeta, Eta, Delta and Iota. The aggregate insured loss was around $21 billion; so initial estimates for Ida are already in excess of last year’s total. The frequency of loss in 2020 without a particularly severe storm meant that many syndicates sustained multiple net retentions without being able to recover much under their reinsurance programmes. Ida promises to pose a different challenge, with a single loss through tiered reinsurance programmes. While different companies and syndicates have different reinsurance buying strategies, a rule of thumb is that reinsurance programmes tend to become engaged once the insured loss exceeds $10 billion. Excluding Covid-19 claims, catastrophe and major losses added just under 10 percentage points to overall loss ratios for the Lloyd’s market in 2020. Coupled with the losses arising out of storm Uri, it appears very likely that the ultimate catastrophe cost for 2021 will exceed the costs incurred in 2020’s hurricane season. The Atlantic hurricane season runs until the end of November, with the peak risk in September.
Lloyd’s introduced the Catastrophe Risk Operational Framework in 2019, with the intention of aligning catastrophe underwriting appetite with the best practitioners in the market. The writing of catastrophe reinsurance has evolved not only since Hurricane Katrina in 2005, but also since the triple loss in the form of $100 billion of loss arising out of Hurricanes Harvey, Irma and Maria in 2017. Prices in the reinsurance sector are estimated to be around 45% higher now than they were in 2017, although many have noted that the increases for reinsurance have not been as strong as in previous hardening cycles. We will have a better idea of the likely effects on reinsurance pricing in the coming weeks, especially as the reinsurance market heads (at least virtually) to its annual rendez-vous in Monte Carlo. If the market begins to tighten further, we can anticipate changes to syndicate business plans to take advantage
Who to Contact
Andrew ColcombHead of Syndicate Research, APCLDirect line: +44 (0)20 7825 7176
Jed RomanResearch AnalystDirect line: +44 (0)20 7825 7177Email: Jed.Roman@ArgentaGroup.com