Hurricane Ian to force a reevaluation: Millette, Hudson Structured

Coming on the heels of five heavy catastrophe loss years, major hurricane Ian’s impacts in Florida and the resulting insurance, reinsurance and ILS market loss, could trigger a wholesale reevaluation of the provision of catastrophe insurance protection, according to Michael Millette.

The insurance-linked securities (ILS) market, including catastrophe bonds will need rebuilding, Michael Millette, Founder and Managing Partner of Hudson Structured Capital Management, told Bloomberg news in an interview.

Hurricane Ian’s impacts are set to be deep and widespread through the catastrophe insurance, reinsurance and insurance-linked securities (ILS) market, with ramifications for all types of ILS instrument, right through to catastrophe bonds that are often closer to the top of the towers of protection insurers and reinsurers buy.

With industry loss estimates from modelling firms and brokers wide-ranging, but narrowing on a solution of in excess of $30 billion, perhaps nearing $50 billion once all losses are counted, the implications for the industry are significant.

Millette told Bloomberg that, “The scale of insured losses that appear to be emerging from Hurricane Ian on the back of five prior years of heavy losses will instigate the sharpest crisis in catastrophe insurance markets since the aftermath of Hurricane Andrew in 1992.”

Previously, Millette has called the catastrophe bond “the most successful of the children of Andrew,” but even these instruments are set to now come into play and perhaps on a level not seen before.

But that is what the ILS market was designed to do, provide risk capital to protect insurance and reinsurance firms against the really significant peak catastrophe events, of which major Florida hurricanes were always in scope.

Also speaking with Bloomberg, Tom Johansmeyer, Head of PCS at Verisk Analytics, explained, “The job of these instruments is to inject capital into the industry at a time when the industry needs it.”

Which is exactly what will happen next, as losses flow through the various tiers of the industries capital base, from primary insurers, to reinsurers, as well as ILS funds and catastrophe bond investors.

Millette also said that ILS investors will likely be forced to reevaluate the “entirety of the landscape, including cat bonds,” Bloomberg explained.

There will also be a need to “rebuild the market”, Millette said.

We’re already hearing chatter from some companies that are going to be severely loss affected by hurricane Ian that catastrophe bonds could become even more of a focus for their reinsurance towers, in the wake of the storm.

This is because there is an increasing recognition that traditional reinsurance capital may become even more constrained for peak catastrophes and especially for Florida, but that in cat bond form the capital markets are seen as more likely to have capacity available, even in the wake of hurricane Ian.

Now, if only the industry could lower the costs of issuance for catastrophe bonds, reduce the level of intermediation fees required and really deliver the efficient, capital markets-backed capacity at scale that the insurance and reinsurance market is now going to need, after what is looking set to become a really historic loss event.

Hurricane Ian’s losses could also push some capital out of the industry, of course, as every major loss event has tended to do.

Consecutive years of losses have been particularly challenging for the ILS market, not least due to the way capital can be locked up and trapped, with no real clarity over whether it is ever going to be recovered until ultimate losses of cedents and sponsors become clear.

This is set to make the market structure of ILS and also reinsurance increasingly important, as capital must continue to flow to the world’s peak catastrophe risks. But it is perhaps time the industry looked at whether capital is currently being deployed in the best possible way and we firmly believe an event like Ian could stimulate a wave of innovation in ILS and reinsurance, as well as, in time, force through market disruption that has been held back by incumbents for now decades.

The industry needs to continue to serve its clients and risk capital is only becoming more important in the challenging and volatile global environment. With problems such as climate change to respond to, the risk transfer industry has a lot of work to do.

Hence, a reevaluation of the industry, as Millette suggests, is no bad thing (we believe), as long as it includes a serious reflection on and optimisation of the market structure and risk-to-capital chain.

It really is time to trim the fat out of the risk transfer transaction, to enable more institutional capital to participate in catastrophe risk-linked business in a more efficient way, and to earn the returns it really deserves, being the risk bearer in the equation.

Finally, Philipp Kusche, Partner and Global Head ILS & Capital Solutions at TigerRisk Capital Markets & Advisory, told Bloomberg that losses from hurricane Ian could actually stimulate more capital to enter the ILS and reinsurance sector.

“The market was already constrained,” Philipp Kusche said. “This will add more pressure and you could see prices go up which in turn could attract more capital, including opportunistic capital.”

Also read:

– Hurricane Ian to cause Florida indemnity & FloodSmart cat bond losses: Twelve.

– Hurricane Ian Florida insured wind & surge losses $28bn – $47bn: CoreLogic.

– Hurricane Ian economic loss in Florida around $65bn: RMSI.

– Hurricane Ian: A historic hit for Florida, no matter the quantum of loss.

– Hurricane Ian to impact cat bond funds. Plenum says hit to be “limited”.

– Hurricane Ian to add reinsurance rate momentum, disrupt Florida market: KBW.

– A particularly broad cat bond mark-down this Friday?

– Cat modeller data hinted at hurricane Ian’s $50bn+ industry loss potential.

– Hurricane Ian: Rapid weakening may see losses nearer $32.5b, says KBW.