Quota shares & aggregates drive reinsurance cat losses in 2020: Jefferies

Industry losses from catastrophes and severe weather events are estimated to have reached $87.3 billion in 2020 by the Jefferies equity analyst team, but with frequency a significant factor, it’s assumed the main source of losses for reinsurance capital was through quota share and aggregate covers.

In reviewing 2020, the analyst team from investment bank Jefferies said that, “2020 was a costly year for insurers and reinsurers, especially for those underwriting US based risk.”

However, there were no really significant insurance market loss events, with the largest single industry loss event being hurricane Laura at close to $9 billion.

While US convective storms and severe weather was the main driver of annual losses, at around $27.8 billion by the analysts reckoning, this is made up of numerous smaller events, again reflecting the frequency loss year that 2020 was.

“Within the industry, we note that the high frequency and lower severity of losses leads us to believe that insurers will retain a higher proportion of the losses,” Jefferies analysts explained.

Adding that, “Amongst reinsurers, this also leads us to expect that a higher proportion than usual will be incurred through quota share and aggregate covers.”

For some reinsurers, and this will also apply to some insurance-linked securities (ILS) funds and collateralized reinsurance vehicles, the aggregate covers in question may only have neared triggering right at the end of the year.

We understand this has driven some trapping or retention of collateral in a few cases, as cedents waited at year-end to establish whether any recoveries are valid against their aggregate protection.

For those ILS funds investing in quota share reinsurance arrangements, including sidecars, and private quota shares, some flow of losses will have been experienced through the year, although given where many quota shares sit and the relatively average losses experienced across the year, the share of losses through these may only have been attritional in 2020.

Given the trend towards aggregate reinsurance recoveries, the analysts believe that a disproportionate share of losses may have fallen to reinsurers in the fourth-quarter of the year.

Another issue that Jefferies analysts note, is a trend towards loss creep for a number of catastrophe events that occurred in 2020.

“Data points relating to some severe weather losses and wildfires have become increasingly negative, with loss estimates rising. At the moment, it isn’t clear whether this problem is contained to publically available data, or if reinsurers have also under-reserved for claims,” the analysts explained.

Adding that, if that is the case, “Then its possible that this drives reserve strengthening for losses booked earlier in 2020.”

The analysts further explain that, “Laura is a notable case, where our estimates have risen 80% since August 2020 and industry forecasts have been revised upwards from a range of $4bn-$8bn initially to a maximum of $13bn today.”

The wildfires in the western United States, so California, Oregon and Washington, are another case in point, “US wildfires occurred primarily between August and early October (3Q) but loss estimates subsequently rose between October and December (4Q). In our forecasts, we lifted our estimates from $5.6bn in September, to $11.5bn in October, to $12.5bn today. Within the same period, industry estimates have also been revised up from a range of between $4.0bn-$8.0bn to $7bn-$13bn.”

We understand that creeping losses from 2020 could also have driven some trapping of collateral discussions around year-end, with some cedents concerned that loss creep could have triggered their aggregate reinsurance or retrocession covers.