In a report on the potential hurricane threat posed by tropical storm (soon to be hurricane) Harvey, analysts at Peel Hunt highlight that it’s not a major hurricane that the re/insurance market needs to fear, or that will turn pricing. A series of smaller loss events where the majority of the exposure is retained, could be more impactful.
Latest updates here.
The report highlights Lloyd’s of London insurance and reinsurance firms with exposure to U.S. hurricane events, saying that the slim profits being made could easily be eroded were there to be a series of smaller hurricane, or indeed man-made losses, where the majority of the exposure was retained.
The market regularly discusses what is required to turn reinsurance pricing and move the softened market to one that exhibits at least a little firming.
Some call for massive mega-catastrophes, such as a $200 billion U.S. hurricane as the only way the market will turn, given that would erode a significant amount of reinsurance capital and insurance-linked securities (ILS) capacity.
But Peel Hunt say that re/insurers, specifically in the London market although this does apply to Bermuda and other markets as well, could find themselves hurting after just a moderate set of loss events.
“With underlying margins under pressure across the industry, even a series of modest Hurricane losses (particularly those that fall within retentions) during the peak season will highlight the low double-digit returns the Lloyd’s insurers are generating on a risk-adjusted basis,” the analysts explain.
Profitability is so marginal in the London and other insurance or reinsurance markets today that losses retained are perhaps more of a threat than really major events, over the short term.
But the question is whether either will make a significant difference to reinsurance pricing and result in the market hardening significantly, or whether they could just result in an end to the softening and enforce stability of rates for a little longer.
A lot of that will come down to the ability of capital to flow into reinsurance markets after loss events, something that of course has become much easier to achieve today.
With the appetite of institutional investors to access insurance and reinsurance linked returns remaining very strong, it’s to be assumed that ILS fund managers may be the fastest to recapitalise after an event and if the losses are only moderate they may not even face as impactful a loss as re/insurers, given where ILS plays in the reinsurance tower.
In fact, a profit eroding set of small to moderate catastrophe losses from hurricanes could tip reinsurers into the red while not having a particularly major impact on some ILS funds, particularly some of the larger and lower volatility focused collateralized reinsurance funds.
This could position ILS funds which escaped without too much of an impact well for recapitalising and indeed upsizing on their investor allocations, in order to offer capacity back to the market very quickly.
We would suggest that for traditional reinsurers this scenario could actually be more damaging than the major event that wipes out a lot of ILS capital, as it could result in ILS funds having an opportunity to increase market share while reinsurers are struggling to recapitalise quickly and unable to bump up rates all that much.
Harvey, which is set to intensify into a hurricane in the coming hours, is heading for a more densely populated region of the Gulf coast around Houston, Texas, which of course increases the chances of a meaningful industry loss occurring if the storm can intensify significantly.
Peel Hunt’s analysts say that; “A major hurricane is unlikely to turn the cycle. However, a series of smaller events that fall within retentions could force carriers with slim margins into a loss, triggering cutbacks and a stabilisation of the cycle.”
Harvey currently looks to pose the largest threat to the Gulf of Mexico in a number of years, there hasn’t been a hurricane landfall in Texas since 2008. Peel Hunt highlights that, of the London players, Beazley, Novae and Lancashire are the more exposed, while Hiscox is less so. However Peel Hunt also highlights the de-risking undertaken by Lancashire lately.