At industry loss of $20B some cat bonds will see notional losses from Sandy: Credit Suisse

Another event report on hurricane Sandy and the superstorms potential impact on reinsurance and the catastrophe bond market has been published by investment manager Credit Suisse. Again, the update has been published via the London Stock Exchange by Dexion Capital for their DCG Iris ILS fund which acts as a feeder fund for and invests substantially all of its assets in the CS IRIS Low Volatility Plus fund.

Credit Suisse joins almost everyone else in acknowledging the high level of uncertainty that remains in estimates of insurance market losses from Sandy, saying that they are ‘receiving mixed signals and reports from insurers, reinsurers and modeling firms’. They say that the estimates from risk modelling firms have steadily risen until the average grew to $16 billion. The Credit Suisse event report must have been written prior to AIR Worldwide increasing their loss estimate range yesterday, as the average estimate from the three main risk modellers is now at almost $19 billion.

Then Credit Suisse discuss the, perhaps lower than expected, initial insurance industry loss estimate from Property Claims Services (PCS) which was announced as $11 billion. They note, as we did last week here, that PCS estimates nearly always increase as claims are filed and access to catastrophe zones becomes easier. As we said last week, the largest increase in a PCS estimate in recent years was 70% and if we apply a similar increase to the initial estimate from PCS the final estimate would be $18.7 billion, very close indeed to the mid-point of the risk modellers current estimates.

Credit Suisse said that they believe that the impact on the re/insurance industry is clearly below $25 billion, given where the PCS estimate has begun, and that it is likely that the PCS figure won’t clear $20 billion.

The $20 billion figure is important, explain Credit Suisse, as many transactions including catastrophe bonds are based on an industry loss trigger derived from PCS published loss estimates. Credit Suisse said that by their calculations, at an industry loss of around $20 billion, some positions, including some cat bonds, will begin to see notional losses from hurricane Sandy.

We’ve been stressing the importance of that $20 billion industry loss since the storm struck. There are a number of private reinsurance transactions and ILWs which would certainly be triggered should the PCS number exceed $20 billion. There are also a number of cat bonds which would definitely be at risk of losses at that number.

Credit Suisse also note that the estimates from risk modeller RMS and that reinsurer Swiss Re released yesterday of $20 billion to $25 billion are realistic and possible, and ask why the large gap between the PCS figures and these other industry loss estimates? Credit Suisse explains that PCS captures losses from U.S. insurers but does not capture certain risks which are directly placed into the international reinsurance market, such as the direct and facultative large risks market. From that perspective Credit Suisse says a difference in estimates is obvious and can be explained.

It is going to be interesting to see how PCS’ loss estimate increases at the next reporting interval which is due in January. There will be a lot of eyes on this number watching very closely to see how the gap between modelled loss estimates and the PCS surveyed estimate closes up.

Impact wise, Credit Suisse says that their forecast is unchanged on the industry loss side where PCS figures are used. Their assumption remains unchanged from the $18.5 billion estimate they had previously announced.

However, Credit Suisse now say that on reinsurance and indemnity based transactions their position is more conservative because of the difference of opinions in published estimates and their view remains above $20 billion.

It is very difficult to forecast the impact to indemnity transactions at this time but Credit Suisse say that their fund performance estimates fully take into account their cautious view on industry losses. That’s the sensible approach as it means their investors will not face sudden, unwelcome surprises.