Maria: How big is it really & are reinsurance rate rises likely?

Equity analysts that track the insurance and reinsurance industry all seem to be shifting their opinions more in favour of broader rate rises in the reinsurance space, following the announcement from AIR Worldwide that hurricane Maria could add between $40 billion and $85 billion to the industry losses from recent catastrophes.

The number has scared some, confused others and many market sources are currently trying to work backwards from AIR’s loss estimate, using what little information is available, to extrapolate how the hurricane Maria hit on the Caribbean, and in particular Puerto Rico, could affect the wider industry.

The industry loss estimate from AIR is considerably above where analysts had been putting the impacts of hurricane Maria on the Caribbean. Estimates had suggested an economic loss of up to $50 billion, but with the insured impact much lower at $15 or $20 billion.

Now the analysts are factoring the new estimate into their thinking on the reinsurance sector and most feel the aggregation of losses from hurricane Harvey, hurricane Irma, hurricane Maria and the Mexico earthquakes will bring the total industry impact to a level where some of the excess capital is beginning to get drained away.

First, European analysts at Morgan Stanley explained today that the aggregation of catastrophe losses could drain reinsurance capital enough to halt the majority of reinsurer capital return activity (as reported by our sister site).

The analysts explain that the impact of recent events “should drive higher (re)insurance pricing” although they explain this remains uncertain, as “We note a number of weeks of the Hurricane season remain and recognise other dynamics influencing pricing with for example the need for additional reinsurance protection from primary insurers given multiple large loss events, material losses for alternative capital “tying up” capital in long claims processes and on the other hand potential ample capital availability on the sidelines.”

Keefe, Bruyette & Woods (KBW) analysts provide some useful background information on insurance penetration in Puerto Rico, which is estimated to account for as much as 85% of the hurricane Maria loss estimate by AIR.

In 2016 Puerto Rico had approximately $1 billion of catastrophe-exposed direct written premium, KBW says, although the local insurance commissioner puts Puerto Rico P&C insurance premiums at just under $2 billion.

The local insurers and those with headquarters in Puerto Rico due to their market share all utilise large amounts of reinsurance coverage, KBW explains, with the major insurers active on the island ceding around 38% of their premiums and others that operate there ceding 22% to reinsurers.

Mapfre is the most exposed reinsurer, KBW believes, followed by companies such as QBE, AIG, Lloyd’s of London, Munich Re, Chubb, HDI Global and others such as Swiss Re, Everest Re, XL, Aspen, Assurant, Alleghany, AXIS Capital, SCOR are all among the most exposed to hurricane Maria.

But despite the impacts, KBW explains that; “Notwithstanding the much bigger-than-expected losses, we still expect property catastrophe reinsurance rate increases to be limited to regions affected by the 2017 hurricanes.”

While some property catastrophe reinsurance rate rises are to be expected, the analysts do not expect this to be sufficient to counteract the effect of lower book values of reinsurers, due to the losses suffered.

Credit Suisse’s analysts noted that the loss estimate from AIR Worldwide is considerably higher than the amount the industry had been expecting, leading them to opt for something a little lower at around $25 billion as being more reasonable in their opinion.

However, the analysts from Credit Suisse said that there is around $275 billion of insured value in Puerto Rico, which based on AIR’s estimate and 85% or $34 billion to $72 billion of it being from the island, would mean that hurricane Maria resulted in a loss of somewhere between 12% and 26% of total insured value.

Given the damage pictures coming out of Puerto Rico that range does seem plausible, given the widespread destruction that has been reported on the island.

KBW’s analysts also note that business interruption in Puerto Rico could be a factor, with the island having a tourism industry worth over $6 billion per annum. They also note that pharmaceutical exports are a major part of Puerto Rico’s industrial-base, with companies such as Novartis, AstraZeneca, Johnson & Johnson, Amgen and Eli Lilly, all having bases there.

Analysts from Alliance Bernstein also said that if the AIR Worldwide loss estimate proves accurate, they would expect it to have some knock-on effect at the forthcoming January reinsurance renewal season.

U.S. based analysts from Morgan Stanley also opined, saying that the mounting third-quarter catastrophe loss burden would significantly impact re/insurers’ earnings and excess capital positions, leading them to say, “We think the heightened catastrophe losses should support improving property (re)insurance pricing.”

With losses from recent disaster set to result in an industry impact somewhere in the region of $83 billion to as much as $165 billion, taking the low and high-end of estimates from AIR and RMS for all these Q3 events, this quarter could be the most costly on record for the reinsurance industry and certainly the most costly for ILS and alternative capital providers.

The industry should easily be able to withstand such losses, Morgan Stanley’s analysts say, but with earnings impacted and some excess capital now expected to be eroded, the pressure to raise rates is going to increase. As a result the analysts see a heightened chance of price rises at upcoming renewals.

Given where the losses from recent events are falling, there is an expectation among our market sources that retrocession pricing could be the first to turn, as some retro specialists are expected to take fairly hefty losses.

That will also impact alternative reinsurance capital, particularly some of the reinsurer owned retro sidecar vehicles, or the big collateralized vehicles also reinsurer owned.

These tend to be higher risk than many ILS manager funds, even those focused on private ILS, although many of these ILS managers could experience negative returns in both August and September due to recent events.

So retro could be the first area to turn and of course retro capacity can often be more focused on the aggregation of losses across the globe or very specific in terms of location of a peak peril, so rises there could be broader as a result of the typical product configurations.

Reinsurance companies would likely experience an increase in the costs of their retrocession, much of which may have been eroded, so there will be a supply and demand factor to this as well. Demand for replenishing retro could be high. Would that result in new capital inflows and could that dampen price rises as a result though?

Reinsurance rate rises are more likely to be regionally focused, across the areas where the events have hit and losses have been felt.

There will be a significant hit to private ILS and collateralized reinsurance arrangements as well, so ILS funds will find capital locked up and may need to mobilise new capacity, both to replace trapped collateral and to take advantage of opportunities.

New capital inflows do have the potential to dampen rate rises across the industry though and the speed of capital reload for ILS players could be crucial here.

With reinsurers facing loss development across now five events, including the two Mexico quakes, there is going to be a risk that some companies are so tied up in responding to the losses that they are unable to respond to new coverage demand as rapidly.

ILS managers that can quickly mobilise new capital and respond to demand could find they are able to grow their portfolio on the back of recent losses, making themselves a more important reinsurance partner in the process.

Whether any rate rises that flow through are long-lived remains to be seen. We’d tend to expect that any bump in prices is more likely to be a one-or-two renewal feature of the market, after which slow and steady softening may return.