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Hagibis + Faxai industry loss may be close to Jebi + Trami: Credit Suisse


An early estimate suggests that Japanese typhoon Hagibis could eventually drive in excess of $10 billion of insurance and reinsurance industry losses, which when added to the other recent typhoon Faxai could see the 2019 typhoon season leaving a larger dent in the industry than 2018’s Jebi and Trami combined.

typhoon-hagibis-satellite-japanIt has to be stressed that it’s still extremely early for any industry loss estimate for Hagibis to prove accurate (at least it would be unusual at this stage), but as reinsurance firms and ILS funds look to quantify their potential exposures to the typhoons, it’s an important consideration that 2019 could end up being more costly in Japan than 2018.

Given typhoon Jebi’s significant loss creep over the last year, which some estimate to have resulted in a roughly $15 billion industry-wide hit, there is without doubt going to be some additional conservatism added to estimates for Faxai and Hagabis as a result.

We’re already seeing this in estimates from AXIS Capital, Everest Re, RenaissanceRe and Arch Capital.

The fear of being caught out and having to significantly increase loss reserves for a second year in a row will put many in reinsurance and retrocession on a more cautious footing in 2019.

Which will likely result in the potential for higher reserves to be set and can also have important ramifications for ILS funds, due to the chances of collateral being held and trapped by counterparties, as we’ve been explaining since the storm struck.

There is the potential for collateral to be held, particularly on any aggregate contracts that are exposed given the two storms coming in close succession, leading to some concerns among some ILS players that the conservative nature of loss picks could result in more collateral being held than would normally be expected. We’ll have to wait and see how this plays out.

In a report, the Credit Suisse equity analyst team note that “preliminary estimates indicate industry insured losses from Hagibis could exceed $10 billion.”

At a guess, this estimate will be based on early modelled storm footprint estimates from brokers or risk modellers.

Given the importance of the rainfall and flood component with typhoon Hagibis, likely to be the major driver of loss, and the fact that the models do not all deal particularly well with rainwater run-off flooding, or predicting levee breaks and other key factors associated with this loss, this early number should be considered very speculative at this time, we’d suggest.

Added to this, industry sources differ significantly, with some saying the lack of wind damage means Hagibis will be a smaller loss than Faxai, while others say the flooding complications, business interruption and fact the two typhoons are so close together will more than make up for the lack of wind, due to claim and loss inflation and amplification.

So, at this time it’s incredibly hard to tell where Hagibis could land, in terms of industry loss, or how much the two 2019 Japan typhoons could amount to together.

Were Hagibis to prove a near $10 billion typhoon industry loss, while Faxai is around the $7 billion to $8 billion that seems a current market consensus right now, that would be very close to 2018’s total from Jabi and Trami (around $18bn).

So it’s not totally unreasonable to suggest that the combined 2019 insurance and reinsurance market loss from Japanese typhoons could eclipse that seen in 2018.

Sometimes the size of the loss isn’t all that matters though and while an estimate for another roughly $18 billion of industry losses from Faxai and Hagibis could prove too ambitious, the storms are going to have serious ramifications for the market anyway.

This year, the focus will be on how challenging the assessment of two Japanese typhoons coming so close together again is.

There will also have to be a focus on gaining a better understanding of why Japanese typhoon losses have escalated beyond modelled expectation quite so much in the last two years. There is a question over whether the risk models have underestimated exposure in the past, as well as the potential for demand surge and other loss amplification factors, which also naturally leads to questions about whether the industry has been underpricing this risk.

In addition, the availability of capital to replenish any eroded retrocession should be a subject of some discussion as we move through the coming weeks, as too should be the state of the retrocession market at the upcoming January 2020 renewals.

Sidecars may also come into focus, as a number of reinsurers are likely to pass on a decent chunk of their Japanese losses to third-party investors.

The same goes for other reinsurer managed third-party capital joint-ventures, investors in which are again likely to support their sponsors losses in Japan to a degree.

The industry loss warranty (ILW) market could also be an area that receives some attention, as at $5bn+ there is the potential for some contracts to be hit (if there are any live and exposed at that trigger point, there were in 2018), if either of the 2019 typhoons loss escalates to $10bn then even more so.

As ever, when multiple catastrophes occur, second and subsequent event structures (ILW or otherwise structured) could also begin to look at risk, if the industry estimates rise.

So, there is a lot more to focus on than just the pure size of the industry impact with these storms.

Aggregate retrocessional or reinsurance structures are fewer in number we understand this year in Japan, after the impacts seen thanks to Jebi and Trami, as well as other 2018 loss events in the country.

But there likely are some and the erosion of the deductibles for these aggregate positions is almost assured, while at the same time some major insurers are anticipating that their occurrence coverage could be triggered if either the Faxai or Hagibis loss rises high enough.

In summary, yes complications could result in 2019 typhoons costing practically as much as 2018’s for re/insurers, but at this time it’s impossible to really tell and it will be some weeks until that call can be accurately made. But the events are going to prove complex, a challenge to assess and the losses will flow through much of the industry, being well-reinsured, with ramifications for third-party capital and ILS of course.

Also read:

Hagibis loss complex to assess, ILS deductible erosion possible: Twelve.

Hagibis loss could match Faxai, may accelerate reinsurance rates: KBW.

No cat bond loss from Hagibis, price impacts to be short-lived: Plenum.

Typhoon Hagibis causes severe flooding, damage across swathe of Japan.

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