Faxai loss to near $10bn, Hagibis $15bn, climate change a factor: RenRe CEO

The CEO of reinsurance firm RenaissanceRe said that his company believes typhoon Faxai could drive as much as a $10 billion industry loss, while the more recent typhoon Hagibis could a roughly 50% larger bigger at approximately $15 billion.

The figures are certainly at the higher-end of current industry estimations (or slightly above), with risk modellers suggesting Faxai could be up to $9 billion and Hagibis up to $16 billion.

But certainly not outside the realms of possibility.

These figures have potential ramifications for those in the industry loss warranty (ILW) market.

This is because a Faxai loss at $10 billion could bring any exposed ILW contracts with a 10bn trigger into play, causing them to face potential losses. While Hagibis, at $15 billion or more, could again surpass another ILW trigger point (if any on-risk contracts use 15bn currently), while any second-event Japan exposed ILW’s would almost certainly be at-risk.

Outside of the immediate issues of ILW triggers, the prospects of a $25 billion Japanese typhoon loss from these two events would certainly impact reinsurance capital relatively heavily, dent the retrocession market further , trap more ILS collateral and strengthen calls for rate increases in January and April 2020, perhaps beyond.

CEO of RenaissanceRe Kevin O’Donnell discussed Hagibis’ impacts during the reinsurers third-quarter earnings call yesterday.

He explained that while typhoon Hagibis impacts similar areas of Japan to Faxai, the angle it travelled over land meant that it spent more time inland and dropped considerably more rainfall, driving the extreme flooding seen.

“We think Faxai will approach a $10 billion industry loss event and Hagibis will be approximately $15 billion,” O’Donnell explained.

Adding that, “In total, during the past two years, 10 tropical cyclones have made landfall in Japan. So in aggregate Japan has experienced upwards of $50 billion of insured losses from the recent storms.”

Those are unprecedented numbers in terms of the industry impact from Japanese typhoons.

Prior to 2018, Typhoon Mireille from 1991 was considered the most costly Japanese typhoon ever for the insurance and reinsurance industry, with some estimating it cost the global industry up to $9 billion, although the local insurance association pegged the impact to Japanese insurers at almost $6 billion.

Now, 2018’s typhoon Trami may slip just beneath that typhoon in the loss league table, with 2019’s Faxai above it, then 2018’s typhoon Jebi above Mirielle and vying for first place with 2019’s Hagibis.

So four of the top five Japanese typhoon insurance industry loss events look to have occurred in just the last two seasons.

Something that should perhaps send a warning signal to the broader insurance industry that their modelled expectations need to change and underwriting along with it.

O’Donnell highlights his concerns, saying, “I raise these Japanese typhoon losses now, because they highlight several issues our industry continues to struggle with: climate change, deficient modelling, poor underwriting, loss creep and trapped capital.

“2017 and 2018 were the largest back-to-back loss years for insured natural catastrophes in history and 2019 is continuing the trend. With Dorian coming within 90 miles of Southern Florida landfall, it could’ve been much worse.”

The RenaissanceRe CEO and his company believe that the industry is facing a potentially unprecedented change, which is causing unprecedented loss activity.

“We believe that the frequency and severity of natural catastrophes has increased,” O’Donnell explained.

Going on to add that at RenRe, “Our team of scientists, meteorologists and engineers at our Weather Predict subsidiary are studying this issue and while it is difficult to distinguish between permanent climate change and transient climate variability, an ever expanding body of scientific research suggests that these trends are in fact man-made.

“With each additional record breaking hurricane, typhoon, flood and fire, the evidence continues to mount that we live in a world where climate change is influencing the frequency and severity of catastrophes.”

O’Donnell went on to explain that he believes the industry may have become overly focused on the influence of so-called social inflation, but said that “the market is missing the point on the mounting influence of climate change on catastrophe risk.”

While the risk models are better accounting for social inflation in their damage models, O’Donnell suggested that the hazard models themselves, which are core to the accuracy of models are not keeping up.

“The current frequency and severity of catastrophic events are more typical and are being driven by climate change,” he said, adding that climate change makes catastrophes more frequent and stronger.

“I am not convinced that industry hazard functions reflect this new reality,” O’Donnell said.

“The insurance industry needs to adapt to this new reality. Climate change will make extreme events more frequent and more severe.”

During the earnings call RenRe’s executives also reiterated the fact that two typhoons striking Japan so close together will exacerbate demand surge issues, as O’Donnell had warned and we reported some weeks ago here.

Already, local Japanese media is reporting a lack of construction and clean-up workers for the typhoon recovery, blaming demand surge and also the general lack of resource in those industries due to social factors such as Japan’s ageing population.

As a result, pegging the losses for these storms is going to be extremely challenging and so aiming higher, with reserves, is likely to prove preferable than lower and then having to report loss creep.

Of course, this approach and the uncertainty can actually exacerbate the trapped capital issues for the ILS sector, meaning those funds with rated balance sheet access and less collateral at risk of trapping will benefit as a result.

Finally, RenRe’s estimate for typhoon Faxai’s industry loss at nearing $10 billion is significantly higher than reinsurer Swiss Re reported this morning, at just $7 billion.

The delta is significant enough to suggest that one company has potentially under reserved, or the other over reserved, if their own losses were set on an industry impact basis.

However, Swiss Re’s estimate for typhoon Jebi remains far below where the industry currently sees the event, so perhaps this is not so surprising to see.

But it does reflect the fact that opinions on these Japanese loss events do tend to differ and therefore it’s important to follow the development of actual (rather than estimated) industry loss reports as they are released.