2017-08-28 - Av Henrik Sjöholm

Hurricane Harvey: extensive flood damages, but no impact on liquid cat bonds expected

As more data has arrived it is clearer that it is a severe catastrophe, mostly due to flooding. It is also clearer that the wind linked damages are limited and are not expected to cause losses in Entropics’ portfolio or to the cat bond market.

From a broad insurance industry perspective, hurricane Harvey is a costly event, but it is not yet possible to assess total loss. AIR Worldwide estimates that industry losses from wind and storm surge will range from 1.2 billion to 2.3 billion USD, not including the ongoing flooding. As a comparison, flooding after Tropical Storm Allison in 1989 cost approximately 11.9 billion USD in economic damages. Less than half of was covered by insurance.

The insurance situation appears to be similar this time, with less than one sixth of homes having a flooding insurance in the affected areas. Also, coverage decreases further inland, entailing that a significant portion of the economic damages will not be covered by insurance.

Insured damages will mostly be covered by direct insurance and, to some extent, reinsurance. An event of this size could, in the longer term, contribute to a hardening insurance market.

In our update on Saturday, we noted that liquid cat bonds have less exposure to flooding. Yet indicative market prices on Friday last week will reflect the uncertainty faced before landfall. This could lead to temporary effects on the Fund’s NAV of less than -0.50 percent regarding Swedish Krona nominated share classes, which we expect to soon recover. This will be the final report on this event, unless the situation develops in an unexpected way, and we will communicate any further development in our newsletter and monthly reports.

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