Hurricanes may force reinsurers to readdress frequency issue

While the relative severity of losses from the recent hurricanes Frances and Charley is well below that of Hurricane Andrew, their coming in the same season may cause reinsurers to give more credence to frequency in predictive models, notes a new report by Standard & Poor’s.The report notes that the close proximity in time of Hurricane Charley (mid-August) and Frances (early September), may elicit focus on frequency issues. In Florida, one mitigating factor against insurer losses is the government-run Florida Hurricane Catastrophe Fund (FHCF), which will kick in as a result of the recent storms, but above which individual insurers may be calling on reinsurance coverage. Also, particularly with Frances, where greater flood damage is expected to result, the U.S. National Flood Insurance Program (NFIP) will mitigate losses to private sector insurers.Running against this is the expectation of a high proportion of commercial lines losses from Charley, but to an even greater extent, Frances, where casualty lines such as business interruption may come into play. The global insurance industry’s position following the storms will also be considered in light of the possibility of further major storms touching down in the U.S. given that it is relatively early in the hurricane season. In fact, Hurricane Ivan is already gaining force in the Atlantic, south of Barbados. Other influences include the recent typhoon and earthquake activity in Japan. Typhoon Songda hit the southern islands of Japan as a category 2 storm on the weekend and continues on a northward trek as of Tuesday.It remains to be seen, S&P notes, what the impact of the storms will be on insurance pricing, and what political fallout there may or may not be as a result of public perception of insurers’ claims handling following the storms.Risk modelers have pegged insured losses from Frances as US$2-6 billion, while the Insurance Services Office (ISO) puts Charley losses at US$7 billion.