Rate increases likely as record cat losses take toll

With predictions of record catastrophe losses for insurers in 2017, premium rate increases look increasingly likely in 2018. However, with near-record levels of capacity and recent growth in alternative capital, any hardening in insurance and reinsurance pricing is expected to be shortlived. Following the double whammy of Hurricanes Harvey and Irma in late August and early September, few were forecasting a big hike in the cost of insurance. Realistically, levels of capital in the market remained too high to allow for a sustained reversal of soft market conditions. But then Hurricane Maria arrived, which according to some estimates will generate losses that could eclipse Harvey and Irma. Despite not making landfall in the US, losses from Maria are widely expected to see the insurance industry suffer record losses for 2017. Fitch Ratings estimates that 2017 catastrophe losses for the global insurance and reinsurance sectors will exceed $100bn and could even reach $190bn by the end of the year. The upper-end estimate would be the highest single year of catastrophe loss on record and would weaken capital at some reinsurers, increasing the risk of rating downgrades, Fitch said. Even at the lower end, 2017 would be only the third year in history that insurance industry catastrophe losses have exceeded $100bn. Fitch’s numbers followed the release of AIR Worldwide’s loss estimates for Hurricane Maria. The storm is expected to cost insurers between $40bn and $85bn according to AIR, although RMS put the figure much lower at between $15bn and $30bn. Insured losses from Maria add to those from Hurricane Irma of up to $50bn, as well as $25bn from Hurricane Harvey and $3bn from the Mexico earthquakes. Even before these events, insurers were counting the cost of several typhoons in Asia during August and July, as well as some $20bn in catastrophe claims during the first half of 2017, driven by storms in the US. According to Fitch’s Chicago-based global reinsurance head, Brian Schneider, Maria has the potential to impact industry capital if losses come in at the high end of modelled estimates. However, it is too early to tell which companies will be most impacted, he said. “The modelled range of estimated insured losses is still wide and at the lower end the loss is less of a capital issue, but [Maria] would add to the earnings events of Hurricanes Harvey and Irma,” Mr Schneider told Commercial Risk Europe. Despite the prospect of record catastrophe losses, Fitch believes the insurance industry's strong capital levels greatly limit any risks to solvency. The statutory capital of the US property casualty industry is more than $700bn, while total global reinsurance capital is about $600bn, it said. However, Fitch believes that for some reinsurers and insurers –especially those located in Puerto Rico and Florida – this year’s cat events could hit capital, resulting in ratings downgrades if not addressed through capital raises or other mitigating actions. “Even if 2017 is a record year of catastrophe losses, we believe these can be absorbed by the very strong levels of industry capital. However, it has the potential to change the psychology of the market such that pricing stabilises and even increases at the renewals. At a minimum, pricing will respond in loss impacted areas,” said Mr Schneider. A number of commercial insurers have already posted hefty loss estimates. Chubb said it expects losses of up to $1.6bn from Harvey and Irma. Lloyd’s expects losses from Hurricanes Harvey and Irma to reach $4.5bn, while some pundits suggest that Maria could add several billion dollars to the market’s losses. QBE said 2017 will likely prove the costliest year in the history of the global insurance industry and announced an increase in its own reserves for catastrophe claims and large individual risks that will hit earnings by $600m. Even before Maria, Munich Re warned it is likely to record a loss in the third quarter of 2017 as a result of Hurricanes Harvey and Irma, adding that it might miss its profit guidance for the full year. Spanish insurer Mapfre, one of the largest insurers in Puerto Rico, said its net loss from recent storms and earthquakes would be between about €150m and €200m. Commentators have been speculating about whether the prospect of record catastrophe losses in 2017 will spark a hardening of the reinsurance and insurance market. A research report issued by Morgan Stanley said that the catastrophe losses should increase pricing, although most investors it spoke to are sceptical of a hardening market. London market insurer Hiscox said rates are already increasing in response to the storm losses. Announcing combined net claims of $225m for Harvey and Irma, Hiscox Group CEO Bronek Masojada said: “These events are already having an impact on rates in the global insurance market, particularly in affected areas and specific sectors. 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.” Steve Hearn, CEO of London and international broker Ed believes the recent spate of hurricanes will impact the year-end reinsurance treaty renewals and this will filter down to the primary market faster than it has in the past. “There is a lot of speculation about what will happen with capital. I am afraid that we will see a ratings impact during the 1 January treaty reinsurance renewals,” said Mr Hearn. “This will fall very quickly to the primary market, which is not something we have seen in the past, it will drop very quickly [down to the primary market],” he told the annual Brokerslink conference in Marrakesh, Morocco. However, Mr Hearn does not believe that a hardening market will be sustained, because new capital is likely to flow in. This view is shared by David Flandro, global head of analytics at JLT Re. Prior to this year’s hurricane season, the expectation was for further softening in 2018, albeit moderating compared with the decreases seen in previous years, according to JLT Re. Mr Flandro believes that some upward pricing pressure is now likely and that reinsurance prices might rise for affected lines of business at the 1 January renewals, and possibly even at the major US reinsurance renewal in June. However, any potential increases will be muted by mitigating factors, namely the industry’s strong capital levels, growing levels of alternative capital and because losses from Harvey and Irma, although large, should fall within modelled expectations, Mr Flandro told CRE. Circumstances today are different to previous large loss events, such as the 2001 World Trade Centre terrorist attack – which triggered rate increases of 30% – and Hurricanes Katrina, Wilma and Rita in 2005, according to Mr Flandro. The industry capital base was lower in 2001 following the US liability crisis, while today the sector finds itself with near record levels of capital. While the impact of hurricane losses on reinsurers earnings could be sizeable, any reduction in capital is likely to be met by reinsurers’ own capital generation as well as continued inflow of alternative capital, believes Mr Flandro. However, this year’s hurricane losses are significant, he said. They break a five-year run of below average catastrophe losses for the insurance market, which has been a significant driver for softening property catastrophe rates in recent years and has boosted reinsurers’ results. The recent spike in loss activity could also change perceptions of risk and the mindset of the market as insurers and reinsurers reconsider their view of large catastrophe loss events, said Mr Flandro. Hurricane Maria showed that a $10bn-plus catastrophe loss was possible for a non-US landfall storm, while Irma came close to hitting the major US city of Miami. In addition, alternative capital providers, such as the catastrophe bond market and collateralised reinsurers, are expected to suffer losses from the three hurricanes. This will be their first genuine test, Mr Flandro said.

Rate increases likely as record cat losses take toll

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