Insurers should innovate in wake of Hurricane Harvey, says expert

Insurance law expert Nick Bradley of Pinsent Masons, the law firm behind Out-Law.com, said only a small proportion of homes in the US have insurance covering flood damage, and suggested there was scope for the insurance industry to innovate more to offer products protecting communities from such catastrophes.

“Hurricane Harvey has caused extensive damage to property, both residential and commercial, across several of the southern states in the US, including severe disruption and loss in its fourth largest city, Houston. Yet, despite predicted economic loss in the range of $30 billion to $90bn, insured losses are forecast to be only in the range of $6bn to $10bn,” said Bradley. 

Analysis carried out by the University of Wisconsin's Space Science and Engineering Center and reported by the Washington Post suggested that Harvey was a one-in-1,000 year event which has no precedent in modern observations.

According to the analysis, 3,643 square miles of Texas was covered by more than 40 inches of rain and 28,949 square miles were covered by 20 inches of rain during the last week of August. The storm destroyed 7,000 homes and damaged another 87,000, and 50 people died.

Ratings agency Fitch last week said Harvey was unlikely to trigger ratings downgrades of individual property and casualty insurers or reinsurers. Fitch said this was because indications remained that Harvey would be an earnings and not capital event for the industry.

The agency said it believed a large proportion of economic losses would be uninsured or covered by the US government's National Flood Insurance Program (NFIP), as losses are likely to be more heavily flood-related than wind-related. The NFIP currently has $23bn of debt owed to the US Treasury with a total borrowing capacity of $30.4bn, which could be reached with losses related to Harvey, according to Fitch.

Fitch added that because there were 25 reinsurers providing flood reinsurance protection to the NFIP the individual loss sustained by each should be “manageable”.

Bradley agreed with Fitch's analysis.

“One of the reasons for the large gap is because much of the loss is flood damage to residential property not covered by insurance. Some of it will be covered by the NFIP, some of which is reinsured in the international reinsurance markets, but not everyone has that protection,” Bradley said.

“On the flip side, although this is a catastrophe, insurance and reinsurance markets will take this loss in their stride. It is not seen as a market-moving event, because of the amount of capital in the markets. No doubt there will be disputes as to coverage, around issues such as causation, wind versus flood damage, aggregation, but unless Irma or other hurricanes follow up with more severe damage to the same areas, rates are unlikely to move,” Bradley said.

“It indicates that there may be scope for a wider role for insurance markets, even in the most developed economy,” Bradley said, pointing to the amount of spare market capacity available.