Hurricane Milton is Set to Cost Insurers Billions

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The cost of Hurricane Milton is anticipated to be one of the highest in recorded history | Credit: Joe Raedle, Getty Images
RBC analysts forecast that Hurricane Milton will cost insurers around US$60bn, making it one of the costliest natural disasters of all time

Hurricane Milton, a Category 5 storm, has struck Florida's Gulf Coast leaving a trail of destruction and sparking concerns across the global insurance and reinsurance industries. Analysts have forecast potential insurance losses of up to US$60bn, a figure that could shake financial markets globally.

The hurricane made landfall late Wednesday, forcing the evacuation of more than one million residents. It is now being counted as one of the most catastrophic storms to hit the region in recent history.

Early estimates suggest the scale of damage will mirror the devastation of Hurricane Ian, which also ravaged Florida in 2022.

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Rising losses amidst increasing climate risks

If Milton’s projected US$60bn in losses materialise, it would place the hurricane among the most financially damaging on record, behind only Hurricane Ian and Hurricane Katrina which struck in 2005. With costs adjusted to account for inflation, Katrina resulted in over US$125bn in damages and US$65bn in insured losses. That is without even mentioning the huge, tragic death toll. 

But how have natural disasters affected the insurance sector in the years since Katrina? Recent analysis from the Swiss Re Institute points to a concerning trend: insurers are increasingly facing growing losses from extreme weather events, many of which are exacerbated by climate change.

In response to the increasing frequency and severity of such disasters, insurers and reinsurers have already begun raising premiums, particularly for properties deemed high risk. Contracts have also been tightened as companies seek to mitigate their exposure to these unpredictable events.

Total destruction in New Orleans after Hurricane Katrina, 2005

Industry preparedness and financial resilience

RBC Capital Markets analysts have suggested the insurance industry is well positioned to absorb the financial impact despite the size of the losses. While the numbers are eye-watering, RBC suggest that the sector has taken significant steps since Ian, particularly in reinsurance and building financial resilience.

RBC believes that improvements in reinsurance contracts and stronger financial reserves across the sector mean insurers are better prepared for major events like Hurricane Milton. Barclays analysts, meanwhile, are slightly more cautious, projecting that Milton’s insured losses could climb above US$50bn in the fullness of time.

Hurricane Milton ripped through the Gulf of Mexico on October 9th, making landfall in Florida | Credit: Getty

Market reactions and the outlook for reinsurers

Shares in global reinsurers including Swiss Re and Munich Re, as well as Lloyd’s of London players like Beazley, Hiscox and Lancashire, have slumped in recent days.

The market’s immediate reaction is one of concern, with the uncertainty around Milton’s long-term impact weighing heavy on investors. However, RBC analysts have expressed optimism about the industry’s prospects of bouncing back and responding better than in years gone by.

This optimism stems from the expectation that reinsurance rates will harden following such a significant event. Price hikes, which tend to follow major catastrophes, could help insurers recover some of the lost capital, although this would come at a cost to policyholders, particularly those in high-risk areas.

The underwriting room at the Lloyd's of London HQ, one of the companies whose shares have declined in value in the wake of Milton | Credit: Lloyd's

The future of insurance in a changing climate

The sad fact of the matter is that many thousands of Hurricane Milton's victims will not have been insured against flooding or other related damages.

Speaking on this subject, Bloomberg's Opinion Editor, Mark Gongloff, says: "An inch of water can do $25,000 damage to a house. That means you don’t need a massive storm like Milton to suffer a life-changing financial problem. And yet most of us don’t have insurance against flooding."

Whilst the extent of the damage done by Hurricane Milton is still unclear, many of the areas that have been devastated by previous storms of a similar size, such as Katrina, were more economically vulnerable.

With insurers set to raise premiums in the wake of yet another disaster, many of the people in "high risk areas" will scarcely be able to afford protection. Undoubtedly, this will get worse as climate change intensifies.

Mark Gongloff, Opinion Editor at Bloomberg | Credit: Bloomberg

Will climate change change the insurance sector "forever"?

Andrew Robinson, Chief Executive Officer and Chairperson of the Board at Skyward Specialty Insurance Group, says the Florida insurance market "has been living on borrowed time for 20 years," adding that the hurricane could change the outlook of the market "forever".

Many people concur with Andrew, such as Bill Young, a Tampa Bay local, saying: "The premium increases each year are insane. The market here is operating on US$4,000-$8,000 a year for Homeowners Insurance IF you can qualify.

"The broken market is simply driven by global warming, which not many want to accept."

Andrew Robinson, Chief Executive Officer and Chairperson of the Board at Skyward Specialty Insurance Group

Can we insure a world where weather is so volatile?

Whilst some insurers may have their heads buried in the sand, the truth of the matter is that climate change is going to affect the weather events they insure people against.

Some insurers in California have pulled coverage from areas that are deemed high risk for their proximity to wildfire flash points. This leaves many residents without protection from potentially devastating losses.

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The same is yet to happen in the hurricane-prone areas surrounding the Gulf of Mexico, but the thought is not out of the question as climate change rolls on unencumbered.

These are alarming, amorphous issues for the modern insurance industry. Ones that will have to be addressed sooner, rather than later. It brings to mind a scarily prescient statement from Henri de Castries, former CEO of AXA, from 2015.

He said: "A world warmed by two degrees Celsius might be insurable, but a world warmed by four degrees certainly would not be.”

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