Florence flood insurance take-up lower than for Harvey

Most of the losses resulting from floods caused by Hurricane Florence will be uninsured, given the low penetration rates of the National Flood Insurance Program (NFIP) in the Carolinas, according to JLT Re.

This could leave the FloodSmart Re cat bond intact, said ILS manager Plenum in a briefing to investors.

The broker referred to a map by Munich Re meteorologist Mark Bove which overlays NFIP take-up rates and Florence rainfall totals.

For example, in Onslow County in North Carolina where flood waters exceeded 20 inches, only 6.2 percent of housing units are covered by the NFIP. New Hanover County to the south has also experienced flood waters of more than 20 inches, cutting off the port city of Wilmington.  

Take up by homeowners of NFIP coverage is slightly higher there at 13.4 percent. In Brunswick County, which also has been badly affected by flooding, NFIP coverage is 18.2 percent.

Inland counties have a much lower NFIP penetration but have also seen significant flooding.

For example in Columbus County, where flood waters are more than 20 inches in some parts, NFIP coverage of homes runs at 1.8 percent.

In terms of cat bond exposure, FloodSmart Re is the main source of exposure to Hurricane Florence.

The class B notes attach at $5bn of losses to the NFIP – above the attachment point on the first reinsurance layer.

But ILS manager Plenum said that if damages from the storm remain well below the level inflicted by Hurricane Harvey last year, it was unlikely that even the riskier layer of the bond would reach its attachment point.

The ILS manager referenced opinions from modelling firm RMS that economic damages from Florence would remain well below that of last year’s Harvey. The 2018 storm is not affecting metropolitan areas anywhere close to the size and value of Houston, it added.

The NFIP wrote 204,342 policies in South Carolina and 134,306 in North Carolina with $53.9bn and $33.7bn of total value in-force respectively.

In contrast, Texas now has 738,217 policies worth $205.7bn in total value covered by the programme.

Storm surge and flood risks are not covered in most cat bonds, as these risks are excluded from residential property policies.

But investors are monitoring one Residential Re bond that covers auto risk, sources told this publication last week. 

Losses are also likely to erode the retention of some aggregate bonds, but the aggregate deals protecting USAA and Nationwide Mutual commenced a new annual risk period in June.

Other private deals are a more likely source of claims within the ILS market, including via reinsurance for the South Carolina coastal pool, super-regional insurers active in the Carolinas, or cover provided to MGAs writing coastal cover.

But the fact that the storm took a heavier toll on North Carolina than South Carolina may mitigate losses via the binder market, sources said, as in the northern state the insurer of last resort is more active whereas there is more private market activity in the southern state.

At this early stage, estimates of Florence’s insured industry losses vary.

KCC today estimated that the insured loss from Hurricane Florence will be just $2.5bn. Morgan Stanley analysts put a range of $5bn to $15bn on the storm.

Morgan Stanley analyst Kai Pan said insured losses should be lower than Harvey, due to the eight counties in which disasters have been declared having a total population of under 1 million, versus nearly 6 million in Houston, and Florence’s rainfall reaching 20-40 inches compared to 30-60 inches during Harvey.

Houston had a take-up rate of around 10 percent for NFIP policies during Harvey, the firm noted.

One positive for insurers in facing Florence claims is that there has historically been less opportunistic assignment of benefits activity in the state, which has escaped major storms in recent years, than in Texas or Florida, as well as fewer lawyers with experience of insurance litigation around property claims, said RMS.

“However if the impacts of Florence are significant, lawyers may come up from Florida to develop this business, as happened with claims in New York and New Jersey after Superstorm Sandy,” said managing director at RMS Ben Brookes.

Harvey losses were estimated at around $30bn by Swiss Re last year.

Fema claimed the whole of the $1.042bn of reinsurance coverage for the NFIP, following losses from Hurricane Harvey which it estimated at $8.5bn-$9.5bn as of year-end 2017.