Florence Is a Tragedy for Homeowners, Not Insurers

People in the Carolinas are about to rediscover the difference between the damage a storm causes and what is covered by insurance.

Source: WSJ - Paul J Davies | Published on September 17, 2018

insurance protection gap

Hurricane Florence weakened considerably as it moved over the U.S. coast over the weekend, lessening its speed and causing much less wind damage than had been feared earlier last week. However, heavy rain and severe flooding have arrived, bringing tragedy in their wake.

The problem is that while wind damage is well covered by insurers and reinsurers, flood damage is absent from most homeowner policies and is typically an optional cover in commercial policies.

The total insured losses for wind and storm-surge damage in North and South Carolina could be as little as $3 billion, according to one early estimate from CoreLogic , a real-estate data company. This estimate is much, much lower than earlier warnings that losses could be more than $20 billion. It ignores any flood-related claims from commercial policies for property damage or business interruption, for instance, or for auto-insurance or agricultural claims. But it is an indication that private insurance payouts to homeowners will likely be fairly low, even though thousands of homes will have suffered extensive flood damage.

Some may have bought policies from the government-backed National Flood Insurance Program, which was available in places like Wilmington and New Bern, for example, according to the NFIP website. Reinsurance groups have provided nearly $1.5 billion of cover to the NFIP, but its annual losses would need to hit $8 billion for the entire sum to be exhausted, according to Moody’s Investor Services. If losses are less than $4 billion the reinsurance funds won’t even be touched.

For the insurance industry in general, Florence looks like being a manageable event that will hurt earnings to some degree but won’t affect capital, according to Moody’s. Shares in insurance and reinsurance companies exposed to potential wind losses began to recover on Friday as Florence weakened, and that will likely continue Monday. The affected names include Swiss Re and Munich Re in Europe and Chubb, Travelers and Everest Re in the U.S.

It will be days, or even weeks before the flood waters recede and the full costs of Florence become clear, but this time insurers probably won’t pick up most of the bill.