Hurricane Milton a minor ILS event, but with some trapping & missed ILW triggers: Milliman

Analysis from Milliman concludes that hurricane Milton will end up a relatively minor catastrophe loss event for the insurance-linked securities (ILS) market, based on an estimate of insurance market losses in the $20 billion to $40 billion range.

Milliman Principal and Consulting Actuary Aaron Koch and Associate Actuary David Blake highlight the near-miss with Tampa Bay that could have turned Milton into a far more impactful hurricane loss for the reinsurance and ILS market.

After reviewing past events, as well as the physical characteristics of Milton, and various sources of industry information, the Milliman executives estimate an initial post-event range of $20 billion to $40 billion of industry insured losses from the storm.

At this level the impact to the Florida insurance market is expected to be major, especially for Florida market specialists, domestic companies and the recent homeowners insurance startups.

“For these newer carriers, and for any Florida insurer with significant exposure in Hillsborough, Manatee, Pinellas, and Sarasota counties, Milton might represent the largest event in their company’s history. We expect that several companies will incur a full retention of losses up to the beginning of their reinsurance towers, and additional losses for any portions of the reinsurance layers that they opted to retain. Milton might put some companies under surplus pressure, although this pressure would have been significantly greater with a worst-case Milton path or if another similar event were to hit Florida later in this hurricane season,” Koch and Blake explain.

For the reinsurance industry, hurricane Milton losses are expected to be manageable, but the lower layers of Florida reinsurance towers are likely to be impacted.

Koch and Blake commented, “These layers typically carry a high price (or “rate on line”) and are expected to be hit with some frequency. However, the repeated occurrence of events (Irma, Ian, Milton, and 2018’s Michael) tapping these lower-lying layers over the past decade raises questions about the sustainability of current prices for this coverage.

“In 2022 and 2023, Florida offered state-backed reinsurance for these working layers via the Reinsurance to Assist Policyholders and the Florida Optional Reinsurance Assistance Program; Milton is likely to squeeze the rates of such working layers even further.

“We do not expect material impacts to more remote layers (for the 1-in-50 year storm or higher) across most reinsurance programs.”

On the insurance-linked securities (ILS) market, Milliman’s analysis suggests the losses from hurricane Milton will be a minor ILS market event.

As the ILS market has retreated from many Florida lower layers, in favour of more risk-remote upper-layers and catastrophe bonds, the impacts won’t be so significant.

On the catastrophe bond market Koch and Blake said, “On average, wind-exposed catastrophe bonds over the past two years attach at approximately the 1-in-60 event, a level that should generally be safe from Milton losses.

“Initial industry sentiment around the catastrophe bond market suggests an expected loss impact of only a few percentage points of total value, and in the absence of further events, many catastrophe bond funds should still finish with an overall net gain for the year.”

One issue that could prove more challenging with hurricane Milton is that of trapped capital, for those ILS funds and collateralized players that are writing lower-layer reinsurance and retrocession with a Florida focus.

“We do expect some pockets of the ILS industry, particularly those participating on lower-lying reinsurance layers, are likely to face more tangible challenges when reserving for Milton. These funds may also encounter constraints from locked collateral as the January renewal cycle approaches,” the Milliman execs wrote.

It’s also worth considering how the occurrence of two Florida hurricane events in quick succession, Helene and then Milton, could complicate the claims environment and whether this might have some ramifications for the duration collateral can be trapped by cedents around these events.

There are going to be some challenges in identifying causes of claims and claim attribution to events, which might be a driver of more trapping than some would typically anticipate seeing with exposed ILS contracts.

Koch and Blake of Milliman also highlight potential uncertainties for those that have actively hedged their portfolios, especially with industry loss warranties (ILW’s), highlighting that the fact Milton slipped south of Tampa could mean ILW’s don’t respond.

“Interestingly, as we generally expect these instruments to be set at industry loss thresholds between $30 billion and $80 billion (either on an occurrence or aggregate basis), it is possible that funds hedging against the predicted active hurricane season in this manner might see Milton’s ultimate loss slip under the attachment points of some of their hedges, whereas these hedges might have paid off at a significantly higher level had Milton entered Tampa Bay,” they explain.

Finally, Koch and Blake point out that there are ramifications for some areas of the reinsurance renewals, especially after Helene and Milton hurricane landfalls in quick succession.

They state, “After a significant hardening of property reinsurance rates over the last three years, there has been some market sentiment that reinsurance rates might stabilize or potentially even decrease at the upcoming January renewals.

“While the recent Hurricane Helene might not have moved the needle on this prediction, we expect that Milton will, at least on lower layers of reinsurance towers. This makes rate increases the most likely scenario in 2025. Increases in reinsurance rates then invariably lead to knock-on increases on Florida primary homeowners insurance pricing. 2024 had been a relatively benign year for homeowners rate increases, with rates increasing only +1.7% on average. Milton may herald a shift in 2025 back to the higher yearly increases witnessed earlier in the 2020s.”

The actuarial specialists conclude, and it’s worth noting the comment on reserving uncertainty as this has potential ramifications for loss creep further down the line, “Overall, the damage from Milton will be widespread but generally not out of proportion to past events. Both the wind and surge components will come in lower than was feared, and the total volume of claims should be almost familiar at this point to companies that weathered prior major Florida disasters.

“Given the complexities of hurricane reserving, we rate Milton to have a reasonably elevated level of future reserve uncertainty, but not disproportionately high compared to other events of comparable size.

“What is certain is that once again, the State of Florida and its insurance industry are settling in to pick up the pieces from yet another major, year-defining loss. As anomaly begins to resemble trend in the Sunshine State, there appears to be no immediate relief on the horizon for major insurers or beleaguered homeowners. While Milton is unlikely to cause complete market failure, steadier footing still seems a long distance away.”

Read all of our hurricane Milton coverage.