Hurricane Sally: Significant Flood Damage But Moderate P/C Losses, Moody’s Says

On 16 September, Hurricane Sally made landfall on Wednesday near Mobile Bay, Ala., and the western portion of the Florida Panhandle as a Category 2 storm with destructive winds of 105 mph, causing significant rain and storm surge. The storm moved slowly across Alabama and the Florida Panhandle producing 10-20 inches of rain or more in certain areas, causing significant flood damage, and then moved through Georgia and the Carolinas.

Because Sally appears to be primarily a flood event, Moody's Investor Service said it expects that the National Flood Insurance Program will absorb significant losses because standard property and casualty homeowners policies do not include flood damage. P&C (re)insurers will face losses on commercial and some residential properties although loss estimates will take weeks to tally. Most US homeowners are not insured against flood unless they are located in flood zones. The NFIP is the largest nationwide provider of flood insurance to homeowners and covers most flood losses in the US.

Because flood damage is typically not covered by homeowners policies, Moody's said disputes may arise in cases where the immediate cause of loss (wind or rain from above versus flood) is not clear. Disputes increase and prolong the cost of the claims settlement process and may lead to lawsuits and/or regulatory intervention. P&C insurers also face potential claims on private passenger and commercial vehicles, watercraft and other insured assets. Flood-related auto claims are almost always total losses.

According to FEMA, just one inch of floodwater can cause up to $25,000 in flood damage for residential properties, potentially making Hurricane Sally a costly storm in terms of flood losses. However, unlike Hurricane Harvey in 2017, which was a Category 4 storm that caused widespread flood damage in Houston and Southern Texas, Sally struck in less commercially dense areas and will be much less costly for commercial insurers than Harvey. According to the Texas Department of Insurance’ last estimate, Hurricane Harvey cost P&C insurers approximately $20 billion of gross losses and $10 billion of net losses after reinsurance, with about 80% of the gross losses in commercial property and flood, and about 16% of the losses in auto and residential property.

Moody's said reinsurers could absorb some of the losses from their cedants’ exposures potentially including those from NFIP’s flood reinsurance program, depending on the extent of the losses. The current reinsurance program provides coverage when flood losses exceed $4 billion up to $10 billion with various participation rates by reinsurance layer. On 1 January 2020, FEMA secured a reinsurance agreement with 27 reinsurers that covers 10.25% of losses between $4 billion and $6 billion, 34.68% of losses between $6 billion and $8 billion and 21.80% of losses between $8 billion and $10 billion. In addition, FEMA has $1.2 billion of total catastrophe bonds placed with capital market investors. In 2017, FEMA recovered $1.042 billion of flood losses from reinsurers, related to heavy flood damage from Hurricane Harvey.