After Hurricanes Harvey, Irma and Maria burnt insurance-linked securities (ILS) portfolios last year, many in the industry were expecting more trouble as Hurricane Florence headed towards land in mid-September.
“We had significant buying interest for Florence Live Cat industry loss warranties [ILWs] starting on the weekend of September 8 and 9,” said Patrick Gonnelli, partner and global head of ILS distribution and trading at TigerRisk Capital Markets & Advisory.
ILWs insure investors against total industry losses exceeding a certain amount. Gonnelli saw clients wanting to buy at the $15bn industry loss trigger level, but sellers, fearful of higher losses, only wanted to sell at the $25bn-$30bn level.
As the deaths of around 50 people and the images of submerged communities attest, the storm ended up causing plenty of damage. But ILS got off lightly, which is surprising on the face of it, given how exposed the market is in the US.
As the storm arrived, it slowed down. Instead of punishing the Carolinas with the epic wind speeds predicted, it released torrential amounts of rain.
Catastrophe bonds tend to be more exposed to wind than rain. This meant ILS portfolio managers could rest easy.
“The trading in the secondary market for cat bonds has been very light right before, during and after the storm,” said Gonnelli. Even the one catastrophe bond exposed purely to flood risk, issued by the National Flood Insurance Program (NFIP), may not be affected.
This in turn reflects the exposure of the US insurance industry to flooding. Data firm CoreLogic estimates $6bn-$10bn of insured flood losses from Florence versus $13bn-$18.5bn of uninsured flood losses and says around 85% of residential loss is uninsured.
In the Carolinas, NFIP coverage was scarce. Almost all inland counties had a take-up rate of less than 3%, according to data compiled by Mark Bove, senior research meteorologist at Munich Re.
Experts reckon Florence is likely to affect the earnings of insurers, rather than their solvency.
“We do see better private insurance in the commercial space but in the residential space it’s shocking,” said Stephen Moss, director of capital markets at catastrophe modelling firm Risk Management Solutions.
“This and Harvey last year is a good demonstration of how there is a real need for a structural change in the US flood insurance market,” Moss added. RMS has been developing its US flood modelling, which Moss believes could help spur on the market.
And the shortcomings of the flood insurance market are likely to become ever more visible. Climate change is causing tropical cyclone precipitation to be 40% higher, according to Peter Sousonis, director of meteorology at AIR, another modelling firm.