Harvey, Irma, and Now Maria: How Will Insurers Cope with Such Widespread Damage?

Harvey, Irma, and now Maria. Who would have thought that these three names would strike so much terror into the hearts of residents of Texas, Florida, and now Puerto Rico?

The potential damage figures are staggering: $160 billion for Harvey, $50 billion for Irma, and who knows how much more for Maria. It means that in a period of a little over three weeks, the U.S. mainland and the Puerto Rican commonwealth will have experienced incredibly widespread devastation.

That, in turn, will test the limits of state governments and FEMA, prompt massive amounts of Federal disaster aid, and tax the very ability of many insurers to cope with such geographically diversified disasters.

Even as Irma was striking Florida as a less powerful storm than feared, analysts were questioning how insurers would find sufficiently qualified loss adjusters to cope with the claims. That’s because Harvey struck Texas mere weeks before, and unsurprisingly the focus had been on serving customers affected by it. Inevitably delays in claims handling will occur in Florida.

FEMA has done its best to help Texans and Floridians, and despite past criticism, it has been receiving much improved ratings from citizens there. But now it will have to help victims in Puerto Rico at the same time. That’s a big ask. How the agency copes with the challenge of three concurrent disaster recovery events will provide the benchmark for planners to follow in the future.

FEMA Region II includes Puerto Rico and the U.S. Virgin Islands. Under the leadership of Alejandro De La Campa, the agency will be co-ordinating the emergency support function roles of other Federal agencies, such as the U.S. Army Corps of Engineers, the Department of Energy and the Department of Transportation.

The good news in the here and now is that FEMA has a distribution center — one of eight in the nation — based on Puerto Rico. In a written response to questions on Tuesday, a FEMA representative stated that with a disaster declaration already made by President Trump, FEMA will be providing immediate help. For instance, it has more than 600,000 meals it can provide right away as support for the Puerto Rican government and island residents.

The problem over the longer term is an old one, and one that brings politics into the equation: Where will the money come from? Hurricane Sandy prompted much political in-fighting about federal funding, some of which originated in Texas. Now Texas is the beneficiary of an initial joint funding agreement that the Trump administration was wholly supportive of for both it and Florida.

But Puerto Rico is not only a bankrupt entity, it’s also technically a commonwealth not a U.S. state. That leaves it in somewhat of a political twilight zone. It could be much easier for Congress to ignore the dire need of the island than it would be to ignore the needs of one of the 50 states.

What about private insurance? How much of a role will it play in Puerto Rico’s recovery? Are insurers active on the island up to the task?

Before I get to that, remember what I’ve already told you about Texas and Florida. Texas’ two insurers of last resort were woefully unprepared for Harvey. And in May, Weiss identified Texas as the second-to-last state in terms of insurer strength relative to hurricane strike risk.

Texas had only six strong insurers, the same number as Mississippi, and two more than Louisiana. That means Texans will likely be left on the hook for billions of dollars of surcharges … surcharges that will run for many years … in order to re-build the state insurance funds.

In Florida, the somewhat-lower costs of Irma mean private insurers, reinsurance firms, and the Florida Hurricane Catastrophe Fund should be able to handle storm claims. But this is the first hurricane to have done significant damage in the state since 2012.

After 2004 and 2005 saw several hurricanes impacting Florida, the state imposed surcharges on policies for ten years. So it’s possible Floridians will get socked with additional premiums and surcharges, and that some of the lower-rated private insurers hammered by Irma will run into financial trouble.

Now let’s get back to Puerto Rico. At Weiss, we recently examined the insurers offering homeowners, farming, and commercial coverage there. We found that P&C insurance is low relative to the U.S. states impacted by hurricanes this year. Only $358.9 million in premiums were written on the island in 2016. That compares to $10.9 billion in Florida and $11.4 billion in Texas, as you can see here:

Clearly, Puerto Rico has a much smaller population than Florida or Texas – 3.5 million, versus 20.6 and 27.9 million, respectively. But if you compare premiums paid for various types of coverage to those populations, you see a problem right away: Coverage appears too low.

Puerto Rican insurers collected just $89.18 in business premiums per island resident. That compares to $103.88 in Florida and $95.53 in Texas. The gap is even more glaring when it comes to homeowners’s insurance. Island insurers took in just $13.33 per resident, compared with $423.05 in Florida and $304.16 in Texas.

So that’s one concern. Another is the Weiss Safety Ratings distribution for insurers that write commercial, home, or farm business in these three regions. The “A”, “B”, and “C” ratings distribution is close together for each region. But there are more than twice as many “D” rated P&C insurers in Puerto Rico than in Texas or Florida.

Finally, there’s the actuarial problem here. When pricing insurance policies and deciding where to offer coverage, insurers rely on geographic diversity to help them out. They know that as bad as any one disaster, such as a hurricane or tornado outbreak, will be, it generally won’t impact every single region of every single state they do business in.

As bad as Harvey was for Texas, for instance, it largely impacted the coastal area in and around greater Houston. And as bad as Irma was for Florida, it left large swaths of the densely populated southeast coast – and the Panhandle – either unscathed or only slightly damaged.

But that isn’t the case with Maria. She was large enough and powerful enough to cause damage across the entire island of Puerto Rico. For all these reasons, much of the cost of recovering from Maria may fall on the shoulders of governments rather than private insurers, and some of those private insurers may not be up to the task of paying all their claims.

Bottom line: The challenges to the Federal system of disaster support are clear. Is disaster funding and preparation adequate? Should there be a formal agreement in Congress to provide immediate access to funding if a disaster occurs? Can the individual states be expected to drive future disaster planning and funding?

How officials answer those questions, and how the inevitable long-term rebuilding costs for Puerto Rico are covered, will impact the insurance industry — and your finances — now and for many years to come. But with so many catastrophes striking so many locations in so short a period of time, it’s likely that Texans, Floridians, and Puerto Ricans face increases in premiums and surcharges that will ignite further conversations about who should bear the costs of recovery.

Think Safety,

Gavin Magor

Insurance Insights Edition, By Gavin Magor, Senior Financial Analyst Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.