As the industry absorbs billions of dollars in losses, commercial insurance rates will likely rise.Estimates of insured losses resulting from the three major storms that slammed the U.S. mainland and Puerto Rico over the summer and fall have made 2017’s hurricane season the most expensive in American history. Two disaster modelers, Chuck Watson of Enki Research and Mark Johnson of the University of Central Florida, wrote in a study that this year’s Atlantic hurricane season caused a historically high $202.6 billion in damages.
The fact that 10 of the 17 named storms that formed in the Atlantic strengthened into hurricanes contributed significantly to the damages witnessed in 2017. While that total ranks below the 28 storms charted in the previous record year, 2005, this year’s hurricanes were particularly intense. Hurricane Harvey, for example, dumped 60 inches of rain on Texas, a new high for tropical rainfall. Similarly Hurricane Irma remained a Category 5 hurricane for 37 hours, and was still a Category 4 storm when it made landfall in Florida.
In its summary of the 2017 hurricane season, Munich Re compared this year to 2005, when the reinsurer recorded $85 billion in global insured losses after Hurricanes Katrina, Rita, and Wilma. For the similarly historic 2017, it calculated insured losses of $100 billion, dwarfing the record set in 2005.
Impact on Commercial Insurance Rates
In its 2018 Marketplace Realities report, Willis Towers Watson (WTW) warns that commercial insurance rates will likely rise as insurers cope with recent record-busting catastrophic losses. Like Munich Re, WTW estimates those losses will exceed $100 billion, an amount the firm categorized as a “serious blow” to the industry. “It’s hard to imagine that such a blow will not impact rates,” the report’s authors write.
Consequently, WTW analysts predict a turnaround from the soft market of recent years, forecasting a rate hike of between 10% and 20% for catastrophe-exposed risks and a 20% to 25% rise for catastrophe-risks that have experienced recent losses. Those increases are expected to hit property insurance buyers in the first or second quarter of next year.
Reinsurers, meanwhile, have already begun to mull rate increases as they absorb substantial losses from hurricanes and other natural disasters such as earthquakes in Mexico. At a recent conference, Brian Quinn, CEO of North America for Odyssey Re Holdings Corp., told the audience that the recent losses could lead to “a meaningful change in rate.” Similarly, a published report stated that Hannover Re was considering a 50% rate hike in North America.
Even primary insurers may be forced to raise rates. Travelers Cos. Inc. and Hartford Financial Services Group Inc. are reportedly considering boosting rates to compensate for significant losses.
Besides adjusting rates, insurance underwriters and risk modelers may need to re-examine their forecasting methods to account for increasingly powerful storms. “One of the important outcomes of the 2017 season should be to make sure that the risk models employed by the industry improve their capability to simulate seasonal clusters of strong storms,” note Eberhard Faust and Mark Bove of Munich Re.
Lessons from 2017 Hurricane Season
For insurance agents, the most important lesson from this year’s hurricane season is that natural disasters can hit areas not previously prone to floods or storms. Many homeowners in Texas did not own flood insurance because their properties stood outside a flood zone. When the area was deluged by rain from Hurricane Harvey, however, their homes suffered uninsured damage.
While memories of the storms are still fresh in the minds of their clients, agents should take this opportunity to review property insurance policies to ensure they have comprehensive coverage in the event of a catastrophe. Even if their properties reside in a low-risk area, they might want to consider purchasing flood insurance or other riders that could protect them if a natural disaster strikes.