Swiss Re Insurance-Linked Fund Management

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Only the costliest catastrophe could turn reinsurance pricing: RBC


Despite catastrophe losses in the first-half of 2016 being above the long-term average, “only the most severe event” would result in any meaningful turn from the soft reinsurance pricing, according to analysis from RBC Capital Markets.

The Atlantic hurricane season has been officially underway since the beginning of June and with September being the month that experiences the most landfalling events, on average (between 1851 and 2015), RBC Capital Markets has discussed the potential impact on reinsurers from both an active, and inactive season.

“Industry capital remains at an elevated level and only the most severe catastrophe loss would be enough to cause pricing to turn meaningfully in our view,” said RBC, in a recent report exploring the European insurance and reinsurance industry.

The global reinsurance market remains awash with capital from both traditional and alternative sources, which, continues to drive a supply/demand imbalance that along with other market headwinds, has contributed to consistent rate declines across the sector.

Numerous industry observers and analysts have noted that it will require a significant loss event to remove a sufficient amount of capital from the space, ultimately relieving some of the competition and resulting in a meaningful turn away from the softening landscape.

However, with the capital base so broad and the willingness and volume of insurance-linked securities (ILS) capital sat on the sidelines waiting to enter post-event, analysts have also suggested that any post-event price surge in the future will be flatter than witnessed previously, and so will the reinsurance cycle.

RBC continues to explain that without the occurrence of “the most severe event,” a number of medium-sized loss events could drive a continuation of the recent slowdown in reinsurance price declines, which have been evident in recent months.

But the fact is that the capital level of the reinsurance industry remains strong, with both traditional and alternative reinsurance capital having risen steadily from 2006 to 2015.

“If there is a costly insured loss resulting from the Atlantic hurricane season, we believe that there is sufficient capital in the industry to deal with such an event.

“If catastrophe losses are light during the second half of 2016, we would expect strong earnings but see little potential upside for capital returns vs expectations,” said RBC.

According to forecasters the 2016 Atlantic hurricane season is expected to experience a slightly above average level of activity for the number of events, while the number of major hurricanes is in line with the long-term average of three, says RBC.

But regardless of the number of expected hurricanes during any season, the reality is that it only takes one landfalling event to occur for insurance and reinsurance industry losses to mount.

RBC emphasises this point; “Although it is hard to argue that the more hurricanes that develop, the more insured loss there is at risk. In our view, it is whether a hurricane makes landfall and where it makes landfall that is important in determining insured losses.”

This notion is emphasised by the occurrence of hurricane Andrew, which made landfall in 1992, the only hurricane to make landfall in that year but that remains the fourth largest loss of all time, according to RBC.

Interestingly, RBC continues to explain that nine of the top 20 insured loss events were caused by Atlantic windstorms, highlighting just how important the Atlantic hurricane season is for reinsurance companies and how deadly such events can be.

Supporting this point, RBC states that the level of capital at risk among the top four European reinsurers (Hannover Re, Munich Re, SCOR, and Swiss Re) is significant, and using the most severe windstorm scenario compared with shareholders’ equity at H1, “there is between 10% and 16% of equity at risk.”

“Bringing it all together, Atlantic hurricane season remains a period of great uncertainty for the reinsurance companies. If losses are light, then results for the year are still likely to be strong. However is losses are high then earnings are likely to suffer.

“Another consideration to take into account is that natural catastrophe losses relatively elevated in H1 2016, running above the 10 year average according to Swiss Re,” said RBC.

With reserves running thin and rates continuing to decline at a time of dangerously low interest rates, reinsurers can only continue operating at a profit for so long in the current, challenging and softening landscape.

Should a large loss event occur in the remaining months of 2016 it will be interesting to see how the wealth of untested ILS capital reacts, and whether any turn in price will be evident in the re/insurance and ILS space.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.

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