Hurricane Harvey is expected to result in “extremely complex loss circumstances” making predicting the eventual toll that will be paid by reinsurance capital providers, both traditional and alternative, extremely difficult, according to A.M. Best.
As a result of this complexity, A.M. Best says it is anticipating that this could mean litigation erupts around claims settlements, with alternative capacity providers cited as perhaps more likely to sue.
A.M. Best expects that some primary insurers will exhaust their retentions and tap into their reinsurance programs, bringing the prospects of some hits to collateralized reinsurance and ILS funds that participate as counterparties.
However, the rating agency sees the insurers as well protected, thanks to the soft reinsurance market price conditions.
“While a considerably large event, losses from Hurricane Harvey are unlikely to exceed few, if any, insurers’ top reinsurance limits. Over the past several years, the soft reinsurance market has allowed primary insurers to obtain favorable terms from reinsurers, including higher limits on catastrophe programs and extended hours clauses,” the rating agency explained.
So as the comprehensive reinsurance programs help to lessen the impact for insurers, reinsurers will be trying to identify their share of the loss, a difficult task at the moment.
With industry loss estimates now suggesting the private market could take as much as $10 billion to $25 billion of losses, the share for reinsurance providers will be significant, although far from market turning.
A.M. Best said that the reinsurance bill will be shared globally, with Bermuda, Lloyd’s and the European majors, as well as the ILS fund and collateralized reinsurance market all set to take a share.
A.M. Best said that it expects both TWIA and the NFIP to call on reinsurers for support, which aligns with the expectation that NFIP’s reinsurance program now thought likely to pay out in full.
However, TWIA’s reinsurance program attaches at $2.8 billion of losses and the Alamo Re 2017 cat bonds sit alongside the traditional coverage, meaning that if there is sufficient loss at TWIA to hit the reinsurance layers then the Alamo Re 2017 cat bond could come into play.
Also TWIA is a wind and hail insurer, so if it did eat into its reinsurance layer that would mean the current industry loss estimates for wind damage from Harvey are far too low. Hence we remain a little sceptical of whether TWIA will be able to call on its reinsurance layers, but it is something to remain alert to and we may write more on this later. It’s also worth noting that currently the cat bond market is not expecting an Alamo Re 2017 loss of any size, judging by trading activity and pricing of the notes.
No matter what the reinsurance loss turns out to be, A.M. Best says that it does not expect this to be a capital event, rather it will be a hit to earnings and so not a major turning point for the market.
That said, should loss estimates continue to rise much higher then the traditional reinsurance market will take a growing share of the losses, and the loss falling to alternative capital and ILS funds will grow as well.
Here, A.M. Best warns on the complexity of the hurricane Harvey loss and claims process.
“Given the nature of this loss event, with the majority of loss emanating from flood rather than wind, the complexity in determining coverage will be immense,” the rating agency said.
A.M. Best believes that this could lead to, “Increased litigation of claims settlements, especially from alternative capacity providers where areas of gray within the contract language will be challenged and not influenced by long-term trading relationships.”
The ILS fund markets we have spoken with so far all say that they are already in touch with cedents that are exposed and ready to pay claims on private ILS or collateralized reinsurance layers.
In fact, in many cases the ILS market is keen to settle claims in advance of the traditional market, given they have monthly NAVS to report and are keen to make their investors aware of any losses as rapidly as possible.
Yes, if there are grey areas in contract language then that could be disputed, but in our experience traditional reinsurers dispute unclear terms and conditions just as much as any alternative capacity provider does and so any litigation is likely to come from both sides.
Therefore we do feel it a little unfair to suggest that ILS capacity is more likely to become embroiled in litigation, as it is not really in the best interests of the ILS fund managers or their investors to do so, unless there are clear cases where claims are thought to be invalid in which case reinsurers would likely contest claims as well.
It’s worth reading a piece from our other publication Reinsurance News here, which covers some of the potential for disputes and elements such as business interruption to complicate and ultimately escalate the hurricane Harvey industry loss.
A.M. Best believes that reinsurers will face the bulk of their losses from commercial exposures rather than personal lines, with business interruption and contingent business interruption both set to exacerbate the final bill and these take much longer to establish claims totals, making the prospects of understanding the loss to reinsurance capital anytime soon unlikely.
Finally, A.M. Best says that complexity over where claims sit could also draw out the final payment process, as “Understanding the correlation of losses across multiple lines of business will be an important consideration in assessing the overall impact on rated entities.”