Q2 insured cat losses $13bn+, reinsurers to take nearly $7bn: J.P. Morgan

by Artemis on June 17, 2016

Multiple large catastrophe events during the second quarter of 2016 will likely cause an insurance industry impact of $13.3 billion, of which global reinsurers are expected to assume roughly 50%, or $6.7 billion of losses, according to J.P. Morgan.

After a prolonged period of benign global catastrophe losses a number of significant events took place during the second-quarter of 2016, which analysts at J.P. Morgan say will likely exceed the $13 billion mark.

Analysts expect reinsurers to assume roughly 50% of the losses, which amounts to roughly $6.7 billion, suggesting that some insurance-linked securities (ILS) funds and managers could be hit.

“We estimate insured losses may exceed $13 billion in Q2, equivalent to 37% of the $35 billion figure for the entirety of 2015, and closer to the run rate implied by the longer term (15 year) average of $51 billion per annum,” said J.P. Morgan.

Global reinsurance broker Aon Benfield’s catastrophe modelling unit, Impact Forecasting, said recently that catastrophe events in May alone are expected to cost the insurance and reinsurance industry at least $7 billion.

Of particular note is the Fort McMurray wildfire event, believed to be the costliest single insured loss event in Canada’s history, with catastrophe modelling firm AIR Worldwide suggesting losses could be as much as $6.9 billion.

Furthermore, reports claim that reinsurers will assume as much as 50% of the loss from the wildfire event, suggesting that some ILS funds could also take a hit and, with the possibility that the overall loss could increase further, the impact to reinsurers and exposed ILS players could be higher still.

Elsewhere in the second-quarter the Kumamoto region of Kyushu, Japan was devastated by an earthquake, with the most recent reports claiming that losses have risen another 13% in a week, nearing the $3 billion mark. However, for this event the impact to ILS funds is expected to be minimal as the majority of ILS structures cover larger industry losses.

However, the market seems now certain that a number of reinsurance sidecars, quota share collateralized deals and also some other ILS fund manager positions, will pay some claims as a result of events such as Texas hail storms and Canadian wildfires.

Texas also experienced a series of damaging and costly hail and severe weather events in the second-quarter, with insurance industry losses from the events now reportedly nearing the $3 billion mark. Elsewhere, J.P. Morgan notes flooding in France and Germany, storms in parts of Australia, and an earthquake in Ecuador as notable Q2 catastrophe events.

The abundance of reinsurance capital from both traditional and alternative sources continues to drive a supply/demand imbalance in the sector, fuelling discussions among the industry that a substantial loss event, or series of events is needed to shift the trend of declining rates.

In fact, Artemis reported recently that it would likely take a $200 billion event to hit reinsurance and ILS capital levels, according to analysis from Macquarie.

It remains to be seen if the recent series of losses in the first and second quarter of this year will have any meaningful impact on rate movements in the sector. However, that J.P. Morgan claims losses in Q2 alone are equivalent to 37% of the entire re/insurance industry loss for 2015, suggests there’s more potential for losses to impact rates in a positive way than seen in 2015, although only time will tell.

Increased losses also brings discipline and efficiency to the forefront of industry discussions, practices that insurers, reinsurers, and ILS players have been urged to maintain during the softening reinsurance market cycle.

For those that perhaps lacked any underwriting discipline at recent renewals, aggressively released reserves and loosened terms and conditions (T&C) in an effort to secure business and boost returns in the highly competitive landscape, a return to more normalised levels could create a serious problem.

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