Reinsurance pricing momentum prolonged by 2019 cat losses

The spate of catastrophe events in 2019 may prolong the positive pricing momentum that reinsurers have experienced throughout 2019, according to AM Best. It said it expects reinsurers’ earnings to see further erosion in 2019, following another year of major catastrophe losses. “Recent events such as Hurricane Dorian in the Caribbean and US, and Typhoons Faxai and Hagibis in Japan, likely will have a meaningful impact on the profitability of and pricing conditions for global reinsurers and retrocession players,” said Best. “The loss creep from last year's Typhoon Jebi into 2019 has been a learning curve for many market participants and, as a result, some reinsurers to date have been conservative in providing loss estimates.” The ratings agency said there is still much uncertainty regarding reasonable estimates of losses arising from natural catastrophes in 2019 and the impact on the global reinsurance market. It pointed out that Hurricane Dorian in the Caribbean and US, and Typhoons Faxai and Hagibis in Japan, are three of the major events that will likely have a meaningful impact on the profitability of and pricing conditions for global reinsurers and retro players in the upcoming months. According to Best, some reinsurers have begun to cautiously estimate their losses, but the general consensus is that Dorian will cause an industry loss at the high end of a $6bn to $9bn range. The majority of these losses, approximately 70%, are estimated to come from devastation caused in the Bahamas, with the remainder relating to US exposures. It noted that, contrary to initial expectations, Florida was only marginally affected by the storm, otherwise losses could have been more severe than current estimates. “That alone should have a psychological impact on the market,” said Best. It explained that the combined losses arising from Faxai and Hagibis could be as high as those recorded from Jebi and Trami in 2018, leading to another lacklustre performance for the reinsurance industry in 2019. “However, a third consecutive year of major catastrophe losses may prolong the positive momentum that reinsurance pricing has experienced throughout 2019. Best’s expectation is for an acceleration in rate increases for the 1 January 2020 and, especially, for the 1 April 2020, renewal seasons, with Japan-exposed reinsurers demanding higher returns for underwriting these exposures. Additionally, most players may finally acknowledge a fundamental change in the frequency of these events, prompting them to demand higher rates to mitigate potentially larger losses in the future,” said Best. It also pointed out that severe catastrophe losses may also result in an additional capacity crunch in the retro market. In particular, many insurance-linked securities (ILS) investors that have seen their capital trapped by ongoing development of the 2018 events may face similar conditions from 2019 events. Best said ILS managers may therefore struggle once again to replenish their funds, unless investors are granted commensurate compensation for these expected losses.

Reinsurance pricing momentum prolonged by 2019 cat losses

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