Analysts at KBW have warned that rising losses facing the insurance industry through 2020, with the threat of hurricanes increasing as we move towards peak season and the COVID-19 pandemic hanging over the sector, point to “ever-stronger 2021 reinsurance rate increases” suggesting the 2021 renewals are set for some significant increases again.
Rising losses and costs for insurance and reinsurance interests this year will provide further fuel to the rate fire and help to boost expected renewal rate increases, the analysts believe.
Coming on the back of three consecutive years of large losses for the re/insurance sector, 2020 may be the catalyst for a more prolonged hard market it seems and with losses rising this appears ever more likely.
KBW’s equity analyst team point to first-half natural catastrophe and man-made losses said to have totalled roughly $30 billion for the insurance and reinsurance industry, which is above the historical average for the first-half of the year.
In addition, the analysts point to the more than $25 billion of industry losses currently reported for the COVID-19 coronavirus pandemic, which while lower than perhaps anticipated is another hit to earnings and a dent to capital for the insurance and reinsurance sector.
You can analyse the COVID-19 losses and reserves reported by insurers and reinsurers here, but it’s also important to note that this is a figure expected to rise further and one that does not at this stage really contemplate the potential tail of pandemic claims, or any impacts from future waves of the virus outbreak.
As if that wasn’t enough, given it takes the industry loss from catastrophes, man-made losses and the pandemic to somewhere over $55 billion just for the first-half of 2020, there is the second-half of the year to also consider.
Hurricane activity so far, as well as the forecast for a very active season, points to continuing above-average catastrophe losses for the insurance and reinsurance industry, KBW notes.
Despite the fact tropical storm Marco proved less impactful than expected, Laura is now over the Gulf of Mexico and forecast to intensify into a hurricane of as yet undetermined strength, before striking the U.S. Gulf Coast this week.
That brings the potential for another multi-billion dollar industry loss, to add to the first-half.
Also, KBW’s analysts note that U.S. severe storm and convective weather losses have continued apace so far in the second-half of the year, with “continuing large 3Q20 losses to date”, all of which points to more losses flowing to reinsurance capital sources.
All of these factors brought together suggest “ever-stronger 2021 reinsurance rate increases” KBW’s analyst team believe.
Importantly, the analysts note that a number of companies are approaching their aggregate reinsurance retentions, while major player AIG is now beyond its aggregate reinsurance attachment point, suggesting as loss activity persists, more of it may flow to the reinsurance market.
In fact, even if the current hurricane activity and the ongoing California wildfire situation, prove to drive little in the way of insurance market losses, KBW’s analysts already believe that “we’re already beyond the point of “benign catastrophe losses” impeding 2021 reinsurance rate increases.”
As ever, the one factor we cannot currently predict is the availability of reinsurance capital at year-end and how that could influence the renewals in 2021.
With more capital set to flow into the market on-top of an already estimated $16 billion raised by traditional re/insurers in the first-half of the year, there could be more capital available by January 2021 than we saw a year ago.
Could that dampen rate increases? It remains to be seen and will depend on how much more loss activity occurs this year, as well as whether the expected trapping of some more ILS collateral is more widespread than anticipated towards year-end.