Reinsuring Irma: Losses less severe than feared

  • By Elizabeth Fry

Underlining just how well capitalised the reinsurance industry is, many analysts now believe that the aggregate industry losses from hurricanes Irma and Harvey are more likely to be earnings events than capital events for the sector.

The loss estimates from Hurricane Irma are less severe than feared, according to S&P Global, which had earlier warned of potential capital events - when losses exceed annual earnings and can require raising new capital.

Hurricane Harvey will be enough to exhaust the catastrophe budgets of many of the biggest reinsurers in the second half of the year, but Hurricane Irma - which hit Florida Keys with storm surges and flooding - had the potential to become a more meaningful earnings event, the ratings agency wrote in a report.

Still, despite the losses being less scary than initally expected, the monster storms have the potential to change risk perceptions and management behavior, according to reinsurance industry experts who met at a roundtable held in Monte Carlo on Monday to discuss challenges facing the reinsurance industry.

William Hawkins, an analyst at Keefe Bruyette & Woods, an investment bank, suggested that while Irma’s earnings would affect the pricing of renewals, the industry should not exaggerate how big the impact might be on global pricing. It would take a serious capital event to trigger a "hard" market in which prices would rise.

Thomas Lillelund, chief executive of Aspen Re, said he expected that losses from Harvey and Irma would affect pricing - certainly in the US and maybe elsewhere.

"There remains great uncertainty, but I would expect a reaction from the industry," he said.

'Soften the softening'

Meantime, David Flandro, head of global analytics at JLT Re, said that he expected the losses to shore up the softening market - "soften the softening" - after prices dipped more than anticipated for June renewals, according to the company's risk adjusted rate online index.

Flandro also noted that these storms would make the industry re-evaluate its ability to model such events, such was the unusual path Hurricane Harvey took.

"Things like that are very hard to model; there was a level of unpredictability about it," he said. “These events will remind people that randomness is out there in the market.

"Even for the long periods when no hurricane made landfall there was a level of randomness. I agree that the industry has the capital to cope with these losses, but they could have the effect of changing perceptions of risk premiums and the behavior of management."

The global reinsurers entered 2017 with a robust capital adequacy, which has been one pillar of strength for the sector, said S&P, adding that reinsurance capital reached a record US$605 billion in March.

Separately, Morgan Stanley said US$100 billion of insured industry losses could result in higher reinsurance pricing.

However, despite the industry loss estimates for Irma reaching a US$100 billion or greater under some scenarios, Morgan Stanley analysts also said based on early potential industry loss indications, Harvey and Irma combined would be an earnings event, not a capital event.