Hagibis flood loss alone could reach $10bn, retro ILS most at risk: Twelve Capital

Industry losses from the flood driven damage of typhoon Hagibis could reach into the double-digit billion dollar range, according to ILS manager Twelve Capital, who also highlighted that in the ILS market it is collateralised retrocession that appears most at risk of performance impacts.

Specialist ILS and reinsurance fund manager Twelve Capital had already warned soon after typhoon Hagibis struck that it was likely to prove a complex and challenging loss event for the insurance, reinsurance and insurance-linked securities (ILS) industry to assess.

The ILS investment manager also highlighted the potential for some deductible erosion to occur, as private ILS or collateralised reinsurance could find itself exposed to this typhoon and for aggregate contracts this could add to deductible impacts already building from other events.

At the start of this week, even before risk modeller AIR Worldwide published its estimate that Hagibis would drive an insurance and reinsurance market loss of between $8 billion and $16 billion, Twelve Capital had already suggested that the flood driven component of the market loss from the typhoon would be particularly significant.

On Monday, Twelve Capital explained that given the Japanese media reports of upwards of 52,400 homes being flooded after Hagibis and over 4,100 houses being destroyed or partially damaged, the ILS fund manager was expecting the flood loss to be particularly large.

Twelve Capital compares this significant damage to the flooding experience in Japan in 2018, which saw a reported 12,000 structures affected and caused an insurance industry loss estimated at around $2.7 billion (as of the end of last year).

Given the Japanese media reports for typhoon Hagibis suggest over four times as many properties flooded by the event, Twelve Capital suggests the flood driven loss alone could extend into the double-digit billion range.

The ILS manager explained, “The figures mentioned above may indicate that Typhoon Hagibis flood driven market losses (excluding the wind-driven impact) may end up in the double-digit billion range. However, it should be noted that the final pay-out of flood claims will be dependent upon the underlying exposure affected and with that firm estimates are more difficult to quantify.

“Generally, the pay-outs are typically stepped according to the level of water damage sustained and limited by the so-called “sub-ordinary” policy limits, which represent a fraction of the total sum insured of the subject structures affected.”

Twelve Capital’s suggestion that the industry loss from typhoon Hagibis will extend above $10 billion, thanks to the unprecedented flooding impacts, looks prescient, when you consider AIR’s estimate only came out a day later.

The ILS fund manager cautions against reading too much into loss estimates at this stage, which is prudent, but has clearly spent time analysing the potential for impacts to its own portfolios of reinsurance and retrocession linked assets.

The company still believes that the “ultimate assessment of the insured losses for this event may be a more extended process than usual.”

Twelve Capital still expects there to be no impact to any catastrophe bond positions at this time.

But the ILS manager is expecting some performance impact to collateralised retrocessional reinsurance contracts.

“There may be some potential performance impact and certainly erosion of deductibles to selected private collateralised retrocession contracts with exposure to Japan,” Twelve explains.

In particular aggregate, worldwide catastrophe retrocession covers may be particularly exposed, given the multiple events that have occurred in recent months, it seems.

It’s worth also pointing out that, at the level of losses now being discussed, there is the potential for any on-risk industry loss warranties (ILW’s) exposed to Japan to be threatened, at trigger points of $10 billion and possibly even $15 billion, should Hagibis’ final impact on the market reach that high.

Also read:

– At up to $16bn, Hagibis industry loss to drive rates, with creep possible: KBW.

– Typhoon Hagibis industry loss estimated from $8bn to $16bn: AIR.

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

– 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.