The potential impact of major hurricane Irma, which now has Category 3 status and 130 mph+ winds as it tracks towards Florida, could be a test of the permanence of third-party capital in the global reinsurance sector, according to Standard & Poor’s (S&P).
In a new report, international financial services ratings agency, S&P, has said that despite the strong capitalisation of the global insurance and reinsurance sector, the event could test the resolve of some capital markets investors that participate in the property catastrophe space.
Hardeep Manku, an S&P Global credit analyst, said; “Strong capitalisation will help mitigate the impact, but Irma will likely stress-test not only the re/insurers but also the staying power of third-party capital.”
Third-party, or alternative reinsurance capital has expanded substantially over the last five years or so, now accounting for just shy of $90 billion of total, dedicated reinsurance capital, according to broker Aon Benfield.
As a result of its expansion and increased participation in property catastrophe risks via retrocession, collateralised reinsurance and catastrophe bond transactions, capital markets investors are at an increased risk of losses from events such as Irma.
Furthermore, growth in aggregate structures in the insurance-linked securities (ILS) space suggests that a series of modest events for the re/insurance sector could erode some alternative investors’ aggregates, suggesting losses could be more likely for the current loss-year.
ILS investors are very sophisticated and largely mature in their approach to the asset class, and likely more than aware of the potential risks to their investments in the global re/insurance sector.
The low-correlation and diversification benefits of the asset class remain attractive to investors, and while some might well leave the space in light of major losses when they occur, it’s widely expected that many more will stay the course and a sufficient amount of new capital is sat on the sidelines waiting to enter when the market becomes more attractive.
In fact, we would suggest that the test these days is of who can reload and be there to provide continuity to their clients and the market in the face of major loss events, not who will flee.
However, the intensity and track of Irma still remains a little uncertain. It is scheduled, currently, to hit Florida later today, Sunday, but it could be a much lighter blow than previously expected. Any shift in the path could increase the losses for the reinsurance and ILS industry though, testing both traditional and alternative capital in the sector.
S&P notes how the re/insurance industry is still coming to terms with the loss from hurricane Harvey, which devastated parts of Texas and Louisiana recently. However, the industry will have no respite as “Hurricane Irma is shaping up to cause a far greater hit to lives and homes than Hurricane Harvey.”