Introduction

The devastating storm surge in southwest Florida could broaden the implications of Hurricane Ian for the U.S. property and casualty industry.

The personal and commercial auto physical damage lines, which have been under significant pressure on a nationwide basis for the past 15 months amid rampant inflation in vehicle repair and replacement costs, could experience an influx of flooded vehicle claims. Additionally, a surge in claims on boat owners' policies, which often fall under the inland marine line, could emerge in a region where extensive networks of canals make the use of personal watercraft commonplace, if not essential.

Revised 2022 projections in S&P Global Market Intelligence's forthcoming U.S. Auto Insurance Market Report call for the private auto physical damage combined ratio to rise to a new 25-year-plus high. The direct incurred loss ratio in that line climbed to a staggering 81.9% in the second quarter and has been historically elevated for four consecutive reporting periods.

We estimate that flooding and related fallout from Hurricane Harvey in 2017 — an extreme example given how the storm stalled over what currently ranks as the nation's fifth-largest core-based statistical area, or CBSA, of Houston-The Woodlands-Sugar Land, Texas — contributed approximately 2.5 points to the countrywide loss ratios in both the private and commercial auto physical damage lines. Such a hit seems unlikely from Ian due to the considerably smaller combined size of the Cape Coral-Fort Myers and Naples-Marco Island CBSAs, which are the two that may have been the hardest hit by Ian. But even a few extra basis points of upward pressure would be unwelcome under the extremely challenging circumstances the industry already faces.

A series of Texas Department of Insurance data calls in Harvey's aftermath found that 28% of the claims from the storm pertained to personal and commercial auto business.

This contrasts with Hurricane Irma in Florida the same year, where less than 9.0% of the total amount of claims emerged from lines other than commercial and personal property, private flood and business interruption. Florida Office of Insurance Regulation data did not itemize claims in those other lines, which include a menagerie of about a dozen types of insurance. More recently, data collected by the Louisiana Department of Insurance for 2021's Hurricane Ida show that the personal auto business accounted for 11.3% of claims and 3.5% of paid losses. Factors beyond the nature of individual storms that influence claims rates include geographical differences in the number of uninsured drivers and the extent to which policyholders decline to obtain comprehensive or other-than-collision coverage.

Personal and commercial auto incurred losses from Harvey totaling $2.23 billion and $208.7 million, respectively, reached a combined 13% of the storm's total in the state of Texas. More than two-thirds of the personal auto claims and just less than half of the commercial auto claims involved total losses.

When comparing those values to the total-filed 2017 direct incurred losses in the private and commercial auto physical damage lines in Texas, assuming that claims associated with flooded vehicles would fall under comprehensive coverage, we estimate that Harvey inflated the loss ratios in those businesses by 24.8 and 26.3 percentage points, respectively. The full-year 2017 total of 88.0% in the private auto physical damage line ranks as the highest in at least 25 years in the state of Texas. The commercial auto physical damage direct incurred loss ratio of 90.9% also stands as the highest in at least a quarter century.

Making similar adjustments to countrywide results for 2017 yields the 2.5-loss-ratio-point estimates for both the private and commercial auto physical damage lines. The private auto physical damage result of 66.1% in 2017, including the impact of Harvey, stands to be more than 10 percentage points lower than our revised 2022 projection for the same line, with or without a lift from Ian.

It is too early to determine the scope or scale of the damage caused by Ian to property, vehicles or watercraft, but it seems inconceivable that Ian's auto physical damage claims will come anywhere close to approaching the 211,190 that the Texas Department of Insurance attributed to Harvey. Among other things, data from S&P Global Mobility's Catalyst for Insight show that there were 5.3x as many vehicles in operation in the Houston CBSA as of July 1, 2022, as in the combination of the two southwest Florida CBSAs.

Private auto physical damage losses from Ian well into the hundreds of millions of dollars at a minimum should not come as a surprise, however. In 2004, when Hurricane Charley made landfall at the same spot as Ian 18 years later, we estimate there was approximately $380 million in additional incurred losses in the private auto physical damage line in Florida (or $596 million after adjusting for inflation) relative to a steady-state loss ratio. On a national basis, the private auto physical damage loss ratio plunged between 2003 and 2004 to a result that was even lower than the pandemic-depressed 2020 level, but it increased by 11.3 points in Florida.

Based on our updated 2022 projection for private auto physical damage net premiums earned, it would take more than $1.10 billion in incurred losses to add a full percentage point to the prospective loss ratio. The effect would be magnified in Florida. Excess losses in an amount similar to the inflation-adjusted 2004 value would have added 9.3 percentage points to the state's already lofty 2021 private auto physical damage loss ratio of 75.1%.

The 10 P&C groups that would be most impacted by Florida private auto physical damage claims based on statewide market share do not necessarily maintain significant exposure to the types of property claims most commonly associated with tropical cyclones. Of them, the group led by State Farm Mutual Automobile Insurance Co., The Progressive Corp., the group led by United Services Automobile Association and The Allstate Corp. also ranked among the top 25 in the combination of the fire, allied lines, homeowners and nonliability commercial multiperil businesses in Florida. Berkshire Hathaway Inc.'s GEICO Corp., Florida's largest private auto physical damage writer, had no direct exposure to those other lines whatsoever, and the other five groups had a relatively limited presence.

Determining the impact of individual named storms on the inland marine line is more challenging in light of the breadth of the types of insurance included as part of that business, which includes coverage for everything from cargo transported over land to event cancellation. Nonetheless, S&P Global Market Intelligence data show elevated loss ratios in the inland marine line in states and years impacted by hurricanes. For example, by far the highest inland marine loss ratio in Florida in the last 25 years occurred in 2004 when Charley made landfall. In a particularly extreme case, the direct incurred loss ratio in the inland marine line in Louisiana was 483.0% in 2005, the year Hurricane Katrina struck.

Select large Florida boat owners insurers that write on the inland marine line, based on data from rate filings, include a Progressive program with more than 174,000 policies in force and $123 million in total premiums, and GEICO Marine Insurance Co.'s program for watercraft of up to 26 feet in length that had more than 67,000 policies in force. The company writes business for larger vessels on the ocean marine line, and its 2021 Florida direct premiums written across the marine lines totaled $111.5 million. In recent years, it has carried named-storm excess-of-loss reinsurance coverage from multiple external reinsurers.