The continuation of the Covid-19 coronavirus pandemic into the 2020 Atlantic hurricane season is set to compound challenges for insurance, reinsurance and ILS capacity providers this year, according to Fitch Ratings.
The coronavirus outbreak and resulting lockdown, then slow shift back towards a new normal, is set to exacerbate the challenges posed by any major hurricane landfall’s this season, rating agency Fitch believes.
But the catastrophe bond market has responded strongly, with the majority of new issuance so far in 2020 being exposed to Atlantic hurricanes, as investors continued to support the reinsurance needs of underwriters of hurricane risks, despite the pandemic.
Fitch’s thinking aligns with other reports, that suggest hurricane insurance industry losses could be inflated by the pandemic shutdown and the inability to respond as quickly, as well as the fact that the pandemic shutdown has effectively changed the exposure profile of many industries.
“In the event of a major hurricane landfall in 2020, property insurers’ claims assessment and settlement expertise will be tested by reductions in economic activity and mobility resulting from public policy efforts to combat the pandemic,” explained Christopher Grimes, director, Fitch Ratings.
He continued, “Typical disaster response practices to prevent injuries and losses from an oncoming storm, including evacuation and mass sheltering plans will need to be re-evaluated in light of public health concerns.”
Hurricane forecasts in the main suggest an above average, to far above average, level of storm activity for the Atlantic and Gulf this year.
In addition, Fitch rightly points out the the few forecasters that give landfall probabilities have also predicted higher chances of landfalling hurricanes in the 2020 season as well.
But in 2020 there are significant other challenges now posed by the coronavirus pandemic and the related shutdown, which could exacerbate the response to any natural disaster and also cause more losses to flow to insurance and reinsurance capital.
“The coronavirus pandemic creates unique challenges for the (re)insurance industry during the 2020 hurricane season, but the industry remains well positioned to absorb the risk of an above-average season,” added Grimes.
Fitch notes that it still has a negative sector outlook on the P&C and global reinsurance sectors, reflecting coronavirus uncertainty and near-term market conditions and profitability challenges.
“Potential effects on capital and operating challenges related to the pandemic add incremental vulnerability to insurers from near term catastrophe events,” the rating agency said.
Considerable firming of reinsurance rates in 2020 including at the June 1st Florida renewal will compensate for added risk to a degree, although many would say that rates are only just getting back towards where they always should have been, with a risk commensurate view of the world.
Still, the capital strength of the insurance industry, as well as the reinsurance carriers and insurance-linked securities (ILS) funds that support it, is sufficient to deal with a normal hurricane season, even after the impacts of the Covid-19 pandemic, Fitch believes.
Fitch also noted that there have been a significant number of new catastrophe bond transactions issued in 2020 that contain U.S. hurricane exposure as a key peril, demonstrating that the capital market investor appetite for hurricane risk is not diminished, even after the pandemic.
Already, we count over $4.2 billion of new catastrophe bond issuance in 2020 that has exposure to named storms and hurricanes from the Atlantic basin, with another at least $665 million of new cat bonds that have hurricane exposure still in the market and yet to complete.
That shows the catastrophe bond market’s ability to get through the Covid-19 crisis and continue to provide important reinsurance capacity in significant volume to insurance and reinsurance carriers with Atlantic hurricane exposure.
As well as demonstrating that the appetite from ILS investors for hurricane risks persists, even after the experience with loss creep and major losses over the last few years.
The ILS market and catastrophe bonds are as important a source of hedging capacity against hurricane risk as ever and the ILS investors will be ready to respond should major storms strike during the 2020 season, despite the added challenges from the coronavirus.