Sunday, December 17, 2017

Insurance rater briefing: Hurricane María Could Erode Caribbean, Puerto Rico Insurers

By on September 19, 2017

SAN JUAN – A.M. Best, the insurance rating and information company, says in a release late Tuesday that it believes Hurricane María could be the “barometer for testing the financial strength” of some insurance companies with property risk in the Caribbean, particularly those already impacted by Hurricane Irma and late-2016’s Hurricane Matthew.

Best is monitoring the effects of these storms on its rated insurers and cautions that “a continuation of such extraordinary hurricane activity could exact pressure on credit ratings.”

A new company briefing, titled, “Hurricane Maria Could Test Financial Strength of Caribbean/Puerto Rican Insurers,” states that many insurers in the Caribbean and in Puerto Rico “will be tested as they brace” for the second hurricane to hit the region in two weeks.

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The effects of María, a Category 5 hurricane, “could be devastating” to insurers and reinsurers, the company says, as the track it takes “could hit areas with higher insured values, and that areas that already have sustained damages due to Hurricane Irma may suffer further damage, which would lead to concerns about which event was responsible for which damage.”

In addition, “reinsurance limits after Hurricane Irma need to be reinstated, and although most companies have automatic reinstatement coverage to protect against a second event, not all companies are prepared to cover a third,” the release adds.

According to the briefing, many catastrophe reinsurance contracts also feature “profit-sharing provisions, whereby a percentage of underwriting profit is returned back to the ceding company. Several companies with exposures to Hurricane Irma have already lost millions of dollars in profit commissions due to last year’s Hurricane Matthew, and likely will lose millions more as a result of hurricanes this year.”

Finally, the Best anticipates that the growing frequency of severe hurricanes in the Caribbean could result in higher reinsurance costs when contracts are negotiated next year.

Although Hurricane Irma spared Puerto Rico from a direct blow, the island currently sits directly in the path of María, Best says.

“The island’s property/casualty insurers, like their Caribbean counterparts, have generally modest retentions relative to surplus. In addition, most have significant vertical protection for a severe event. However, Hurricane Maria does not appear to be a typical modeled event and could generate outsized losses,” it explains.

The briefing notes that Hurricane Irma did not breach a majority of the insurance companies’ net catastrophe reinsurance limits, and so “most insurance companies covering Puerto Rico have not faced reinstatement protection premium charges, and, unlike their Caribbean counterparts, have not faced significant infrastructure challenges as a result of Hurricane Irma,” the insurance rater says.

To purchase a copy of the briefing, visit http://www3.ambest.com/bestweek/purchase.asp?record_code=265818.

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