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

The assessment and quantification of insurance and reinsurance market losses after typhoon Hagibis is to be complex and likely prolonged as a result, but there is a chance of some performance impact to private collateralised reinsurance deals, according to ILS investment manager Twelve Capital.

Specialist ILS and reinsurance fund manager Twelve Capital has warned that given flooding is likely to be a significant contributor to the eventual industry loss after typhoon Hagibis, this is expected to complicate the job of assessing claims and estimating market-wide impacts from the storm.

Typhoon Hagibis made landfall in Japan on Saturday evening as a low category equivalent storm. But record levels of rainfall caused severe flooding across a wide-swathe of central and eastern Japan, including around the Tokyo metro suburbs and in cities including Nagano.

Early estimates already suggest the potential for an insurance and reinsurance market loss in the mid-single digit billions of U.S. dollars, perhaps even significant enough to match recent typhoon Faxai.

But Twelve Capital cautions against jumping to any conclusions based on early estimates, as the complexity of the loss is likely to be very high with typhoon Hagibis, making assessment of claims challenging and their attribution also more difficult.

The reason for this is that typhoon Hagibis is likely to be more of a water than a wind loss event, where as typhoon Faxai was certainly more wind damage related.

The ILS investment manager explained, “It is too early to determine reliable estimates for economic or insured losses. Furthermore, Twelve Capital expects the ultimate assessment of the insured losses for this event to be a more complex and therefore more extended process than usual.

“This view is primarily driven by Twelve Capital’s expectation that the major drivers for the insured losses for Typhoon Hagibis will be flood claims. Generally, these type of claims take more time to be reported and therefore ultimately reliably assessed than purely wind-driven losses.

“Previous events however may provide some indication of possible loss ranges for the impact of Typhoon Hagibis on an insured market level.”

Twelve Capital compares Hagibis’ flooding to that experienced in 2018 in Japan, when the country was struck by torrential rains and resulting floods.

“A comparison of the population density of the areas affected by the 2018 flood losses with the population density of the areas impacted by Typhoon Hagibis (assuming similar flood impacts), indicates that flood driven market losses (excluding the wind-driven impact) may end up in at least, the range of USD 3-5 bn,” the ILS fund manager said.

If the flood related impacts total at least $3 billion to $5 billion, it is likely safe to assume that there will be another low-single digit billion of insurance market losses to add from Hagibis’ wind damage as well.

That’s not including any allowance for demand surge, business interruption and other factors.

Assessing how typhoon Hagibis could impact the ILS market and its investments in catastrophe bonds and other collateralised reinsurance assets, Twelve Capital said that the currently available level of information seems to suggest that cat bonds are likely to face only “limited impact (if any).”

However, on the private side of the insurance-linked securities (ILS) market, where reinsurance and retrocession are transacted on a collateralised basis, there is the potential for some erosion of the underlying protective layers sitting beneath private ILS deals.

There is the potential for, “Some performance impact including erosion of deductibles, to selected private collateralised retrocession contracts with exposure to Japan,” Twelve Capital explained.

These are likely to be either lower-down occurrence retro layers, or aggregate layers where other events this year including hurricane Dorian and typhoon Faxai may already have begun to erode some of the protection sitting beneath their attachment points.

Also read:

– 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.