A substantial hurricane or a record level of hurricane activity in 2016 is required to drive any meaningful price increase in the pressured, and competitive U.S. property/casualty (P/C) space, according to Fitch Ratings.
Rates in the U.S. P/C sector have been deteriorating for some time now, owing to a host of market factors including the benign large loss landscape, and ample capacity from traditional and alternative reinsurance capital providers.
Owing to third-party investor-backed reinsurance capacity from the capital markets still largely being focused on U.S. property risks, in part due to ease of entry and greater understanding of exposures when compared with other business lines, the most severe rate compression has occurred in this sector.
“Given the current substantial level of industry capitalization, it would likely take a record individual storm loss or a series of significant losses equal to 15% or more of industry aggregate surplus for consideration of a P/C sector outlook movement to negative tied to catastrophe experience,” says global financial services ratings agency, Fitch Ratings in a new report.
Furthermore, Fitch stresses that owing to the abundance of capital in the market any future positive rate movements as a result of a large-scale catastrophe event might not be the same as in previous pricing cycles, owing to the substantial volume of capital available in the primary and reinsurance property sector.
This notion has been discussed previously by industry experts and analysts that have predicted future pricing cycles to be flatter than those of years gone by, as the wealth of capital from re/insurers, and increasingly the capital markets, could depress any peaks and troughs.
While pricing in the sector continues to decline, there has been a noted deceleration in both rate reductions and the inflow of alternative reinsurance capital in more recent times.
This rate reduction deceleration trend is expected to continue, with analysts at Morgan Stanley recently predicting that on average, pricing at the key June 1st reinsurance renewal season is expected to decline by 3% to 5%. With some also suggesting that rate decline deceleration for consecutive renewals could signal some much-needed stabilisation, perhaps suggesting rates may finally be reaching a floor.
Despite continued rate reduction deceleration, Fitch feels that a record single hurricane event, or a record year for hurricane activity is needed in 2016 in order for positive rate movement in the U.S. insurance and reinsurance property industry.
A view that’s been shared by other industry analysts, with recent reports claiming that a $150 billion to $200 billion event is likely required to drive a shift in the current softening re/insurance landscape.
But what are the chances of a hurricane of this magnitude, or a series of devastating, but smaller hurricanes taking place in the 2016 Atlantic Hurricane Season?
“Meteorologists predict an average hurricane season and insurers and reinsurers in 18 major U.S. coastal states are well positioned to manage losses; however, insurers could face torrential blowback if there is a record breaking storm or battery of storms in succession,” said Fitch Ratings Director, Christopher Grimes.
According to data on the Artemis 2016 Atlantic Hurricane Season page, which utilises predictions and forecasts from seven leading forecasters, including the NOAA and Tropical Storm Risk (TSR), the Artemis Average forecast of 13.9 named storms, 7.4 hurricanes, and 3.2 major hurricanes, is actually above the long-term average of 12, 6, and 3, respectively.
While forecasts and predictions can be useful to risk modellers, insurers, reinsurers, and ILS players to a certain degree, the inherent uncertainty and unpredictability of natural weather events looms.
This is especially true when considering hurricanes, as while the number of major storms might be relatively high for any given season, it’s only when such an event makes landfall that the economic and re/insured losses can start to spiral.
“From the perspective of the re/insurance industry, the intensity and location of storms making landfall are the most critical variables,” says Fitch.
Only time will tell what the 2016 Atlantic Hurricane season brings, and whether any major storms that do develop actually make landfall and cause the widespread damage that’s been seen in the past.
Should a significant market event take place, removing some of the abundance of capital from the U.S. property re/insurance sector, it will be interesting to see how capital providers, especially the relatively untested capital markets investors react, and whether those on the sidelines jump in and mitigate any drastic price movements.