Company loss estimates to increase in 2018, fuel rising prices: Jefferies

The gap between company reported insurance and reinsurance industry losses and the estimates of industry losses is seen as around $20 billion by analysts at Jefferies, a figure which they believe will get filled in as some company estimates are expected to rise in 2018, which could add additional fuel to rising reinsurance prices next year.

The analysts say the most likely explanation for the gap is that some re/insurance company estimates have been too conservative so far and that these are destined to rise in the coming months.

There has always been some concern that estimates from re/insurance companies given in their third-quarter results were going to be too low, given the recency of the catastrophe activity and the fact claims inflation had been expected as well.

Some claims were not even notified until we were into Q4 of the year for the hurricanes, particularly on the reinsurance side, so companies had been making best estimates based on analysis of their books of business and what information they could glean from ceding companies at the time.

Hence some loss creep was to be expected and Jefferies believes this could account for the gap between reported losses and industry loss estimates.

Jefferies analysis shows that pre-tax losses after reinsurance and retrocession stand at $46 billion. The analysts then add an estimated $29 billion loss for the insurance-linked securities (ILS) and alternative reinsurance capital market. But the total falls short of industry loss estimates, which still suggest a combined $90-$100 billion, by just more than $20 billion.

Jefferies believes that this $20 billion loss gap is set to reveal itself in the coming months, as affected insurers and reinsurers deliver updates to their loss estimates, or add them into fourth-quarter results announcements.

As a result, Jefferies says, “We expect upward loss revisions in 2018.”

But they also note that on the other hand, perhaps the industry loss estimates will come down.

We’ve already seen that today, with AIR Worldwide practically halving its estimate of losses from hurricane Maria.

We understand that estimates of the re/insurance impact from hurricane Irma have also fallen in recent weeks.

So if the industry estimate of aggregated losses fell to practically erase that $20 billion loss gap, what would it mean for 2018?

The analysts explain that, “Lower industry losses would challenge the prospect of a material rate rise at the 1st January renewals.”

But they do believe that upwards revisions to loss estimates is the most likely outcome, adding that upwards revisions to loss estimates are common after major catastrophe events as, “Initial catastrophe loss estimates contain a large proportion of subjectively calculated IBNR.”

Demand surge is another factor the analysts highlight, saying that “not all insurers factor in the inflation of rebuilding materials and labour costs post a catastrophe event.” Also business interruption losses could be volatile, particularly with hurricane Maria.

Finally, Jefferies analysts suggest that, “Reinsurers also tend to report losses net of reinstatement premium received meaning that actual losses are marginally higher,” which could cover another portion of the gap.

The analysts believe that the big four European reinsurers have outperformed their peers, in relation to these recent catastrophe events, as “their losses proportionate to book value are materially lower than their Bermudan and Lloyd’s of London peers.”

However, we would suggest that at this time and based on the latest estimate from AIR Worldwide, if only considering the recent hurricanes and the Mexico earthquakes, the impacts to the industry do look likely to be lower than the estimated $90-$100 billion, which could narrow some of this gap.

Whether that will ease off some of the pressure to increase reinsurance rates at the renewals remains to be seen. The California wildfires could be the added pressure needed to help re/insurers secure the rate rises they are searching for.

But it is certainly clear that the loss picture remains muddied at this time and we’re unlikely to get a true picture of the impacts of 2017 catastrophe events for some months to come.

Join us in New York in February 2018 for our next ILS conference