A number of equity analyst teams have adjusted their expectations for price hardening as a result of the impacts of hurricane Maria with the potential for reinsurance price rises, at least in localised property catastrophe regions, right through 2018 now anticipated, but these are not expected to be high enough to provide the payback some seek.
J.P. Morgan Cazenove’s analyst team cited an expectation for reinsurers “earnings for the year to be severely impacted,” leading them to believe the erosion of sector capital could be sufficient to spark some price hardening over the next few renewal seasons.
“This combination of frequency and severity is likely to be sufficiently disruptive to cause meaningful improvements in pricing,” the analysts explain.
Continuing to say that after this aggregation of losses, they think it “Suggests that a bottom of the cycle could now have been reached.”
Estimates of total insurance and reinsurance catastrophe losses for 2017 now range from $120 billion up to as high as $190 billion, depending on where the eventual loss from hurricanes Harvey, Irma and particularly Maria sits, how high the losses rise from the Mexico City earthquake, whether we see anymore major storms this Atlantic season and whether the fourth quarter is average or otherwise.
Hurricane Maria threw a bit of a spanner in the works for analysts tracking re/insurers, as the first loss estimate from AIR Worldwide suggested an industry insured loss of between $40 billion and $85 billion, while fellow risk modellers RMS opted for $15 billion to $30 billion.
That’s made estimating the industry impact particularly difficult and identifying re/insurers market share of the loss equally tricky, but it does at least give a range to work with and even in RMS’ range it puts this year as one of the most catastrophic on record for the reinsurance and insurance-linked securities (ILS) sector.
With ILS funds already taking losses and reporting negative monthly returns for August just from hurricane Harvey, the expectation is that ILS funds losses will be considerably higher from hurricanes Irma and that Maria will add further losses to some players in the ILS fund manager space.
So there will be capital erosion among reinsurance firms and in specialist markets such as Lloyd’s, which revealed an expectation of a $4.5 billion hit from Harvey and Irma alone, as well as some capital erosion and capital trapping in the ILS and collateralized reinsurance markets.
The result? A possible decline in sector capital, J.P. Morgan’s analysts suggest as much as $70 billion, which would take reinsurance sector capital back to levels last seen in 2011, or at least a roughly $30 billion reduction that would take sector capital to 2013 levels.
Since 2011 prices have declined significantly, so this suggests at least some price rises, perhaps regional and property cat, specialty property, commercial lines focused, at upcoming reinsurance renewals.
But the analysts would go further, suggesting that the 2017 catastrophe loss load could be sufficient to stimulate price rises over the coming year.
“While we would expect some fresh capital to enter, we note that since 2011 demand has also increased, suggesting supply/demand may now be more finely balanced. Overall we now see pricing increases as highly likely for FY18E,” J.P. Morgan’s team explained.
The analysts foresee catastrophe budgets for the year being completely exhausted for almost all reinsurers, with major companies such as Swiss Re and Munich Re forecast to experience losses of around $4 billion to $5 billion, with other major reinsurers also hit badly.
Losses of these levels, as well as the impacts to Lloyd’s players, will give significant stimulus to the calls for price increases, meaning the ambition to secure higher rates-on-line will be sector wide.
Even the ILS fund managers are likely to demand higher pricing in loss hit areas such as Florida, although there could, as we’ve explained before, be an opportunity here post-loss for ILS to increase its market share by enforcing its position as the lowest-cost form of reinsurance capital. This is a potential dampener for any rate rises.
Peel Hunt equity analysts also expect an increase in rates for the Lloyd’s market insurers ands reinsurers, following the announcement of losses made yesterday by Lloyd’s itself.
The analysts explain, “We reiterate our view that rates will harden by 10-15% across US property catastrophe reinsurance lines in 2018.”
They also note that there could be more upside than this as rates are starting from near record lows, however they do not feel the losses are sufficient to spill over into the specialty lines and cause much hardening there.
Importantly though, they do not feel that rate rises will provide the full payback for losses that some in the industry may seek, but as we’ve said before, payback is perhaps no longer a feature of a modern risk market where increasingly capital chooses to connect to risk and be paid a commensurate return for doing so.
Historically, reinsurers have asked to be paid back through rate increases, with rates spiking massively after large losses so that they can recoup the financial impact over the next few renewals.
“Rate increases alone are unlikely to offset the impact of 2017’s major natural catastrophe losses. Only those insurers that can materially increase exposures post event will see some important economic benefit, particularly if there are pockets of market dislocation,” Peel Hunt’s analyst team suggest.
This is where there could be an opportunity for the ILS fund market, with those who can mobilise new capital from core investors able to sweep in and take shares, or benefit quickly from any market dislocation.
Overall, Peel Hunt says, “We believe this will trigger a turn in the US property catastrophe reinsurance cycle, albeit fall short of a broad-based recovery.”
There was a similar message from Jeffries analysts this morning as well, forecasting a chance of more meaningful “material” price rises in the reinsurance sector.
The analysts expect price rises to be pushed for as soon as possible, causing an uplift in rates-on-line at the January 2018 reinsurance renewals. However they were non-committal about how long into the future rate rises would persist, with so many factors having the potential to dampen them and install a new pricing floor, albeit at a slightly higher level.
This is also the opinion of a number of ILS fund managers we’ve spoken with over recent days, who suggest that while price rises are inevitable the losses suffered in 2017 may simply be a correction upwards, followed by a new flattening of the reinsurance cycle at a level perhaps 10% to 15% higher than we see today.
What happens beyond these initial price rises is currently anyone’s guess. There is the potential for ILS and third-party capital reinsurance vehicles to mobilise significant new capital to put to work at January and beyond.
There is also a chance that the catastrophe bond market pipeline could explode with activity over the coming months, if it can remain the most efficient way to syndicate risk across numerous low-cost capital providers (as was seen in the record Q2 2017).
That will be fascinating to watch, but the potential for significant ILS market growth will largely depend on how the funds and collateralized vehicles deal with their multiple losses from this quarter.
This is the opportunity for ILS funds to demonstrate their value, efficiency, ability to manage claims and willingness to support their cedents through the tough times.
Get that right and the ILS market comes out stronger and even bigger than it is today.