At up to $16bn, Hagibis industry loss to drive rates, with creep possible: KBW

Typhoon Hagibis loss impact on insurance, reinsurance and insurance-linked securities (ILS) markets is likely to drive further rate improvements at upcoming renewals, but the market should watch out for potential loss creep, analysts at KBW warn.

Image from Kyodo agency (via Japan Today)

After AIR Worldwide issued its first modelled industry loss estimate for typhoon Hagibis yesterday, saying that it expects the insurance and reinsurance market-wide impact will fall between $8 billion and $16 billion, KBW’s analysts said they believe this will help to drive rate increases at reinsurance renewals given this will be the third year of cat losses and second year in a row of major losses to hit Japan.

As more information emerges on the impacts caused by typhoon Hagibis and the potential impacts that will hit the insurance and reinsurance market, sentiments are moving towards suggesting that reinsurance will see further rate firming both at the January and April 2020 renewals.

KBW’s analyst said that the typhoon Hagibis loss added to the also recent typhoon Faxai (estimated at as much as $7 billion in the market), as well as the fact 2018’s typhoon Jebi loss continues to creep, all suggests material losses for Japanese focused insurers and reinsurers, which should sustain the reinsurance rate increases seen in the region at renewals in April 2020 and perhaps even accelerate them.

To a lesser extend KBW also believe that these losses will be sufficient to help sustain rate increases in January as well, given the potential pressure on retrocession capacity.

This is now becoming a real concern, as fresh retro fundraising efforts were always unlikely to replace the capacity lost from that segment in 2018, let alone what may now be trapped (where collateralised) or lost after these 2019 loss events.

In addition, KBW warn that the fact these two typhoons, Hagibis and the previous storm Faxai, came so close together suggests that demand surge and loss adjustment expense inflation will be a feature of their claims process and recovery.

KBW notes that these were explicitly excluded from AIR’s estimate that Hagibis would drive up to $16 billion in industry losses.

In addition, KBW highlights that AIR’s estimate for Hagibis losses also excludes business interruption, landslide, infrastructure and marine lines of insurance business.

The fact these important metrics are omitted from the loss estimate likely indicates, “potential loss creep as losses are formally adjusted given the significant flooding and landslides that occurred from Hagibi,” KBW’s analysts explained.

Which of course suggests that the wide range in AIR’s estimate may prove warranted, if creep really takes hold and if demand surge and LAE inflation is as much of an issue as has been seen with typhoon Jebi.