Tuesday, December 12, 2017

An end to softness?

The reinsurance industry is still processing the scale of losses from the three major hurricanes in the US this year.

After Harvey, Irma and Maria, plus two earthquakes in Mexico, the property and casualty market is probably facing a 2017 loss of around US$100 billion.

Global non-life premiums, by comparison, were US$160 billion in 2016 and the total capital deployed for catastrophes is in the region of US$600 billion.

“This is about to get bad,” said one reinsurer. “There are a lot of people in the industry who weren’t around for the last major loss.”

The expectations are that this could be the most significant loss year since 2005, when hurricanes Katrina, Rita and Wilma left the industry reeling with US$85 billion in insured losses and three reinsurers quit the industry.

This year’s hurricane losses are far more similar to that year than to the 2011 losses from earthquakes in Japan and New Zealand, and flooding in Thailand, which were of a similar scale but failed to move the market. The concentration of losses this time could take a more serious toll.

Even so, the market has been slow to process what is happening. “In Bermuda, it seems like people are sitting around waiting for the retro market to tell them what to do,” said the reinsurer. “The tail is wagging the dog.”

So far, the message from the retrocession market is that rates are rising by 20% or more as trapped capital weighs on the sector while losses are assessed. Having capital tied up is also a major issue for the ILS market, where investors would like to redeploy to take advantage of any price rises.

To be sure, traditional reinsurers would certainly like to see higher rates too — and there are at least some signs that pricing is responding.

“These events are already having an impact on rates in the global insurance market, particularly in affected areas and specific sectors,” said Hiscox Group CEO, Bronek Masojada. “After a number of years of rate reductions, we are starting to see price corrections, most acutely in affected lines such as large property insurance and catastrophe reinsurance, which we expect to spread to non-affected lines.”

Whether this will have a more lasting effect on pricing generally remains to be seen. The abundance of capital from the ILS funds likely means that a 2005-style doubling of premiums will not happen. Even so, a somewhat harder market would be welcomed by many.

One potential lesson from the losses and the problem of trapped capital in the ILS market, according to Lane Financial, could be a favouring of parametric structures in the future, which pay out quickly and therefore don’t become capital traps.

For now, reinsurers are still claiming that this year’s losses are an earnings event rather than anything that will significantly impair capital. That remains to be seen, but it is also worth bearing in mind that the hurricane season is not yet over. And now there are severe wildfires raging through California.

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