Hurricane Matthew could drag down returns for insurance and reinsurance firms, as well as ILS investors, but not offer the sector any solace from the soft market by increasing rates and pricing, according to analysts at Peel Hunt.
With hurricane Matthew bearing down on Florida and the outlook continuing to worsen, analysts at Peel Hunt have discussed the potential impact on property catastrophe rates for the insurance and reinsurance sector, which have been in decline for several years.
The reinsurance market remains overcapitalised as both traditional and alternative sources continue to flood the sector, increasing competition during a period of relatively benign losses and dangerously low interest rates.
Typically, and in soft reinsurance market cycles of the past, a major catastrophe event, such as a hurricane making landfall along the Florida, U.S. coast, would result in cat losses for firms and reduced returns, but also enable rates to be hiked post-event.
However, Peel Hunt explains that the abundance of third-party reinsurance capital both in the reinsurance market and sat on the sidelines waiting to enter, suggests that while returns could be dragged down following hurricane Matthew, it might not be enough to provide firms with any rest bite from the softening market, and increase rates and pricing.
“Given the available excess capital in the sector, this modelled loss can be absorbed and is likely to only have a modest impact on rates, with third-party capital waiting on the sidelines to enter the market post a major event.
“The risk is that Hurricane Mathew will generate material losses in an industry that is already under pressure from declining underwriting margins and returns across a broad selection of (re)insurance lines. A major catastrophe loss may drag returns down without the benefit of significant rate increases down the line,” said Peel Hunt.
The excess capital in the space suggests that it will take an unmodelled loss (as seen in 2005 Katrina) to significantly impact property catastrophe reinsurance pricing and begin to turn the softening market, with the capital both in and outside the space likely more than able to absorb the expected impact of hurricane Matthew.
“The losses would have to be large enough to deplete capital, particularly third-party (non-traditional or alternative) capital that has entered the market,” explains Peel Hunt.
In an effort to bolster returns in more recent times reinsurers have been releasing reserves and, while this isn’t anything new in the sector, with losses being relatively benign until more recently it’s been reported by a number of industry experts that reserves could be running thin.
Insurers and reinsurers are under significant pressure to maintain profitability and remain relevant to the industry they serve, and the warning from Peel Hunt suggests that hurricane Matthew could drive further return deterioration without the benefit of increasing rates in the future.
This would be very detrimental to the reinsurance landscape that is already struggling to underwrite at a profitable level with combined ratios edging closer to 100%, and also finding it hard to generate returns on the investment side of the balance sheet owing to low interest rates.
Global property information, analytics and data-enabled service provider, CoreLogic, has highlighted how storms like Matthew can result in a large volume of homes being impacted by more than just wind and flooding damage.
CoreLogic states that nearly 2 million homes in Florida, South Carolina, North Carolina, and Georgia are at risk of storm surge damage, with the damage potential fluctuating dependent on the size of the storm and where it makes landfall.
Furthermore, MDA Weather Services, a global provider of weather risk and commodity weather support, has warned that hurricane Matthew is likely to cause major power outages in the Southeast.
“With the strong winds expected off the Florida and Carolina coasts, expect some major power outages in the region,” said lead MDA Weather forecaster, Bradley Harvey.
As part of the firm’s Personal Lines insurance market barometer Richard Kerr, the Chief Executive Officer (CEO) of MarketScout, also shared some thoughts on the impact of hurricane Matthew.
“Personal lines insurers are nervously watching Hurricane Matthew as of the publish date of this barometer. The current track of the storm could impact almost all personal lines insurers from Florida to North Carolina. Rate adjustments in these coastal states are very likely if Hurricane Matthew follows the projected path,” said Kerr.
Of course hurricane Matthew looks set to hit returns for insurance and reinsurance companies, plus ILS funds and their investors, and perhaps catastrophe bond investors too.
But with capital eagerly waiting on the sidelines of the market the expectation at this time is that Matthew will not be a sufficiently large loss to significantly move pricing. The 40% or greater price rises post-catastrophe of the past may be gone for ever.
How re/insurers recover who are badly hit by an event like hurricane Matthew remains to be seen, as sustaining lower rates after losing a lot of your capital may be too much for some companies to deal with.
Also read our previous articles on hurricane Matthew: