2024 hurricanes a stark reminder of persistent protection gap for flood coverage, KBRA

As the 2024 hurricane season enters into its final month, KBRA, the global full-service rating agency has highlighted the uptick in storm activity as several weather systems made landfall in the southeastern United States.

Readers will be aware that Florida and a number of other states in the region were impacted by significant wind and flood damage from hurricanes Helene and Milton.

Whilst we don’t yet know the full economic cost of these latest storms, current indications across KBRA’s rated universe of Florida homeowners’ insurers suggests that the overall financial impact is manageable.

“However, the damage profile of these hurricanes, particularly Helene as well as Beryl, Debby, and Francine earlier this year, is a stark reminder of the persistent protection gap for flood coverage,” KBRA said in a new report.

The firm added, that while Helene and Milton caused significant amounts of damage, which will negatively impact earnings in the second half of 2023, insurers did have a particularly strong first half of the year, which will serve to largely offset these impacts and keep surplus levels generally in line with or better than year-end 2023 levels.

From an operational perspective, the agency explained that insurers fared well during both hurricanes, with catastrophe
response programs including the handling of high claim volumes and associated risk mitigation efforts generally
performing as expected.

“In addition, the recent storms may negatively impact the number of policies assumed from Citizens Property Insurance Corporation during the fourth quarter; some companies are likely to be more cautious with their takeout activity this year as there is now an additional year of underwriting data to analyze,” KBRA added.

Furthermore, the agency stated that increased reinsurance purchases by the primary carriers for the 2024 hurricane season provided sufficient balance sheet protection.

It’s worth noting that some insurers are anticipating for Helene to be a full-retention event, while others anticipate
limited insured losses. Most insurers are expecting Milton to be a full-retention event.

“KBRA will continue to monitor reinsurance availability and pricing for Florida homeowners’ insurance companies. While
these events did cause significant insured losses, the current consensus among insurers is that, assuming no additional
named storm activity this year, an adequate supply of reinsurance will be available going into next year’s renewal cycle
on reasonable terms and conditions. Most observers agree that had Hurricane Milton directly hit the Tampa Bay region as
originally projected, reinsurance pricing may have increased significantly. Tampa Bay has not experienced a direct
hurricane impact in approximately 100 years,” KBRA added.

Reported total insured loss estimates range from $5 billion – $15 billion for Helene and from $20 billion – $50 billion for Hurricane Milton. However, for both events, estimates of total economic losses were substantially higher; for Helene, total economic losses were estimated at amounts exceeding $20 billion.

“The primary reason for this disparity is because most of the losses were attributable to flood damage but personal property
insurance policies generally only cover direct or indirect wind damage and exclude most losses from flood damage. Flood
insurance is available separately, but it can be expensive and is typically only purchased by individuals who live in high
flood zone regions or as required by mortgage lenders,” the report reads.

Adding: “A significant amount of flood damage was caused by Hurricane Helene in western North Carolina, an area that has not historically been subject to this peril. Therefore, the majority of flood-related damage from Helene is not covered by insurance, with the difference between insured and economic losses referred to as the “flood protection gap.”

Whilst Florida insurers were generally well prepared for what has been a rather active storm season, they will likely only experience a decline in full-year earnings with balance sheets largely intact heading into 2025.

However, as KBRA states, the protection gap highlighted by Helene due to the extensive flood damage it produced is significant and may become a “longer-term catalyst for changes in flood insurance and mitigation.”