Now it looks highly probable that Hurricane Irma is going to hit Florida head onI’m curious as to how much the economic impacts of this storm and Hurricane Harvey will be.
Estimates of Harvey’s impact on the US economy seem to range from $75 to $100 billion. If Irma is as destructive the total costs could be close to $200 billion. Could we see insurance companies going under from such losses? in 2008 AIG had to be bailed out after losing $99.2 billionin the GFC. Or will it be just a pair of regional disasters, devastating to those affected but business as usual for the economy as a whole?
AIG was bailed out because of their insurance products which covered the derivatives market, not because of standard insurance claims on auto, life, home, etc.
Off-topic, but the now official habit of naming vast bodies of atmospheric disturbance by christian names is getting a bit too cutesy — and should be past it’s sell-by date.
What portion of those predicted losses covered by insurance?
My recollection is that insurers were relieved of responsibility for a considerable portion of the damages in New Orleans, by determinations that the damages were the result of flood (not covered), rather than hurricane/wind (covered). But I may well be mistaken.
Highly unlikely for any of the major players. There are various kinds of coverage for hurricane damage - wind, flood and named storm are the biggies.
Wind - some form of wind coverage is included in most basic homeowners insurance policies and covers damage from storms up to and including tornados, but most now specifically exclude hurricane and tropical storm damage from the base coverage. As an example, I copied this from a major insurance company communication dated March 2017:
Coverage and exclusions vary greatly by state, but most coastal properties have the exclusions above. Wind coverage may also have a separate, sometime exorbitantly higher deductible.
Flood - damage from outside flooding is almost never covered in a base homeowner policy. That coverage must be purchased separately and can be very expensive. It will be required as a condition of a mortgage if your house in in a FEMA flood zone. For reasons that would take too many pixels to get into here, most flood coverage in the US is now written by the Federal government via the National Flood Insurance Program (NFIP). Flood damage is very expensive to repair and the footprint of flood claims is usually much broader than, say, a tornado. What that means, in short, is that the taxpayer picks up most the tab.
Named Storm - this is a kind of middle ground coverage. It won’t cover flood or wind damage from a “regular” storm, but will cover losses from and officially named storm, like Irma and Harvey. It is not included in standard homeowner policies, but is less expensive than full flood and wind insurance. Private insurance companies do underwrite this coverage and will see most of their loss claims from here.
I saw a stat for Houston that said only 19% of Harvey affected residents had flood insurance of any kind. Florida has a higher percentage of covered people, but is still only at 41%. Again, this means the Federal government will be stuck with the biggest part of the tab
Insurance companies will feel much pain from loss claims as a result of these storms, but OTOH they do plan for them. Re-insurance is a common and lesser known way to spread the risk. Insurance companies purchase insurance from each other in order to limit the loss that any single company takes.
TL/DR - Profits will be down for sure, but insurers will survive.
On the reinsurance point we had a couple of insurance companies discover their models were inadequate after the Christchurch earthquake. I wouldn’t be surprised if some insurers are caught short be 2 Katrina scale events in quick succession.
The whole flood exclusion exception strikes me as somewhat bizarre as an outsider. Surely that’s the najor risk that your trying to insure against? Good fir the insurers, but horrifying for the locals I guess.
Major CAT reinsurance typically is for a single event, with optional rebuys when a claim is made. In other words, if you have an excess of loss plan that kicks in after $300M, and pays up to $1B, let’s say Harvey hits and you dip into it, it wouldn’t also cover Irma unless the company re-ups the reinsurance. I would hope all the companies that write policies in Texas and Florida did the rebuy.
It doesn’t matter if the losses are covered by insurance or not. It is still a net loss of inventory comprising the aggregate national (or global) wealth. Something got broken and has to be replaced, at a cost, or gotten along without. That’s the economic effect. …
‘Floods’ are very much defined by location – build your house in a flood plain, then flood damage is a foreseeable loss. It’s reasonable for insurance to exclude that, and require a specific policy for those who need it (just like you need special coverage if you have valuable paintings or jewelry in your house).
Of course, insurance companies have taken that exclusion and extended it to cover lots of things beyond what people think of as a flood. Sewer backup, broken water pipe in your house, rain overflow from your roof gutters – insurance companies will classify these as a ‘flood’ and refuse to cover them. Anything they can do to refuse a claim they will do.
Car insurance generally covers floods, doesn’t it? I had a car caught in a flood (parked in front of my apartment buiding) and they covered that. Assuming it’s so, the car market is about to get wonky.
If you have comprehensive car insurance, yes it will cover a flooded car. But not everyone does. Certainly if you are in the market for a used car, you should be cautious about getting one that has been in a flood.
I meant more that lots of people will be buying cars, not that a bunch of suspect ones will hit the market. Even people that didn’t have coverage will need new cars, and even if they are replacing two cars with the cheapest single junker they can find, that will still put pressure on used car prices.
Without directly answering that question in the link, it’s an important point since the OP compares to direct financial losses to a single company requiring a bailout. The link specifies two areas included in those costs that aren’t typical areas of insured losses. One is an increase in gas prices due to the effect on the oil industry in Texas and Louisiana. Exports (they specify energy related but mention the chemical industry which has lots of uses for those dead dinosaur hydrocarbons) are another big chunk of losses. Another area brought up is employment, with expectations of higher claims for unemployment expected. That’s an area where they expect more losses from fewer hours worked than outright loss of jobs.
A lot of the effects are pretty broad based, both regionally and nationally, as opposed to the very targeted one company losses AIG suffered.