In the second-half of 2020, while impacts from the COVID-19 pandemic continue for the U.S. property and casualty (P&C) insurance space, carriers may find themselves more impacted by losses from recent and continuing catastrophe events, Fitch Ratings has said.
Pandemic-related insured losses and premium volume declines caused by the economic situation will continue to adversely affect P&C insurers, Fitch says.
But now, the impacts and losses from hurricanes and wildfires are rising, leading Fitch to suggest that the pandemic impacts may be outweighed by natural catastrophes losses over the second-half of the year.
Because of rising catastrophe losses, the full-year combined ratio for P&C insurers as a group will likely rise towards 100%, driven in part by further recognition of pandemic-related losses in casualty segments, but potentially outpaced by natural catastrophe losses.
Fitch estimates that third-quarter California wildfire losses and insured losses from Hurricanes Laura and Sally could generate combined industry losses of over $20 billion.
With the toll from California’s wildfires rising all the time, the total could move even higher than that and is continuing now into the fourth-quarter that begins today.
The ramifications for reinsurance capital are clear. Losses will continue to flow to reinsurance providers, both in the traditional and alternative markets.
Aggregation of catastrophe losses across these specific hurricanes and wildfires, but also recent severe convective weather losses and events such as the Midwest derecho, are all set to exacerbate the situation and could cause more triggering, or at least erosion of deductibles, for aggregate reinsurance layers.
“The fundamental sector outlook remains negative due largely to earnings uncertainty,” Fitch says of the U.S. P&C marketplace.
While P&C insurers absorbed the initial impacts from the COVID-19 pandemic, Fitch notes that this has “introduced considerable near-term uncertainty for underwriting performance that is expected to extend into 2021.”
There remains significant uncertainty over the pandemic related business interruption issue, while Fitch notes that losses from pandemic-related business interruption and event cancellation have already driven a 15% increase in loss ratio for some commercial lines, particularly commercial property products (fire, allied lines, inland marine).
Impacts from this will likely continue and are only now beginning to flow more readily into reinsurance markets.
As a result, the knock-on effect for insurance-linked securities (ILS) funds are likely only beginning, as some P&C carriers begin their reinsurance recoveries over the weeks ahead.
The end of year ramifications are clear, that P&C insurance carriers face an elevated loss picture through this second-half, that could worsen with additional tropical storm or hurricane activity and the ongoing wildfire situation.
So upwards pressure on the cost of P&C carriers reinsurance arrangements is likely to persist at least and perhaps intensify, depending on the eventual H2 2020 catastrophe loss burden faced.
All of which suggests rising reliance on reinsurance arrangements for some carriers and the potential for further, attritional at this stage, losses to flow to the ILS marketplace.