The President of ISO, a provider of information about property & casualty insurance risk and part of the wider Verisk group, highlighted that insurance-linked securities (ILS) and capital markets backed reinsurance coverage now constitute part of P&C insurers “sophisticated protection system.”
In a recent report, ISO and the Property Casualty Insurers Association of America (PCI) said that private U.S. property & casualty insurers ended 2017 with sector surplus at a new all-time-high value of $752.5 billion, up $51.7 billion from 2016.
Driving P&C insurer surplus higher in the year was better investment gains, according the report, but also helping to ensure the surplus was not eroded as significantly as it could have been, by the 2017 hurricanes and catastrophes, was the use of a “sophisticated protection system” that includes ILS and alternative reinsurance capital.
The catastrophe losses did suppress the P&C industry’s net income after taxes to $36.1 billion in 2017, a decline of 15.8% from the prior year, but this decline would have been far worse had the P&C insurers not passed on so many of their catastrophe losses to reinsurance partners, including the capital markets.
Neil Spector, President of ISO, explained, “Three major hurricanes and devastating wildfires resulted in significant underwriting losses for insurers in 2017, suppressing the industry’s income but failing to erode its capital.
“Insurers have a sophisticated protection system that includes reinsurance, insurance-linked securities, and their own capital, supporting their ability to pay claims after significantly worse catastrophes.”
However, while providing a buffer to help P&C insurers maintain their capital better, reinsurance and ILS is not enough to make the difference in a sector that continues to struggle for profits at times.
“U.S. insurers are hanging onto profitability through unusually favorable financial market developments. However, the increasing underwriting losses call into question catastrophic rate adequacy, particularly based on long-term global trends toward increasing catastrophic loss frequency and severity and predictions for another active catastrophe season in the U.S. this year,” Robert Gordon, PCI’s Senior Vice President for Policy, Research and International said.
In fact, the U.S. P&C insurance sector fell to a net underwriting loss of $23.2 billion in 2017, according to the ISO and PCI report, far exceeding a $4.7 billion underwriting loss suffered in 2016.
ISO estimates that private U.S. insurers’ net underwriting losses from catastrophes in 2017 were between $51 billion and $56 billion, so that is after the benefits of reinsurance recoveries.
That suggests tens of billions of losses passed onto reinsurance providers, including the ILS market, from the 2017 underwriting year, demonstrating the sophisticated protection that P&C insurers have in place now.
But, as the U.S. P&C industry is struggling to generate an underwriting profit, as evidenced by 2016’s results when losses were much lower, perhaps the sector needs to leverage more risk capital to protect its shareholders and capital even more.
“The increasing underwriting losses call into question catastrophic rate adequacy, particularly based on long-term global trends toward increasing catastrophic loss frequency and severity and predictions for another active catastrophe season in the U.S. this year,” Gordon of the PCI said.
As pushing for more adequate rates is going to be hard, in a market awash with surplus and capital looking to move up the value-chain to get closer to primary sources of P&C risk, utilising reinsurance more effectively, or bringing the ILS market and alternative capacity into your capital structure, may be the best ways to create a buffer to protect against continued underwriting losses.
But of course that reduces the ultimate profits and as investments cannot be relied upon to always deliver the way they did in 2017, the U.S. P&C sector looks set to remain under pressure, making efficiency of distribution and customer retention increasingly key for these insurers.