With the 2021 Atlantic hurricane season now upon us and forecasts calling for another above average level of activity this year, Moody’s Investors Service highlighted challenges this may present to the reinsurance sector, but remains positive on more price momentum, whether it is an impactful year for losses or not.
Moody’s noted that the past five hurricane seasons (2016-2020) have all seen reasonably high activity levels when it comes to Atlantic hurricanes.
There have been at least 15 named storms in each of these years, while 2020 was called hyperactive with its record-breaking 30 named storms forming.
In addition, reinsurance firms will be closely watching the tropics of any sign of a repeat of year’s like 2017, when some of the most powerful and costly storms on record formed.
Moody’s noted that hurricanes Irma and Maria played a major role in making 2017 the largest insured catastrophe loss year on record at more than $148 billion (according to Swiss Re’s sigma and inflated for 2020).
On top of the challenges of potential hurricane impacts through 2020, Moody’s in particular highlights the spectre of rampant inflationary price pressures on materials and labour as a threat the reinsurance and insurance-linked securities (ILS) market needs to watch out for in 2021.
“Given the significant price increases for lumber and other building materials in recent months, losses and loss adjustment expenses from hurricane events will be particularly impacted by demand surge related cost increases for building materials and labor,” Moody’s explained.
That could have ramifications for any hurricane event and should any storms make landfall in 2021, we could see eventual industry losses that look higher compared to similar storms from recent years.
As hurricane season begins, reinsurance pricing is always a high-profile subject, particularly as the renewals have just been completed at June 1st for Florida, with rate increases that were lower than many hoped for.
Despite this and some evidence of softening in ILS specific products like catastrophe bonds and industry loss warrants (ILW’s), Moody’s Investors Service says it expects reinsurance pricing to continue to have positive momentum.
In fact, the rating agency believes positive reinsurance price movements will be seen at January 2022, although noting that “the rate of positive change appears to be moderating somewhat as the supply of reinsurance capacity from both traditional reinsurers and alternative capital providers is growing to meet demand.”
“The elevated level of catastrophe losses in recent years, continued low interest rates and the threat of social inflation on loss reserve adequacy are all supportive of higher reinsurance pricing during the midyear renewals in the US this year,” Moody’s Vice President James Eck said.
“We think this strength in reinsurance pricing is likely to continue into the January 2022 renewals.”
Fresh losses from the 2021 Atlantic hurricane season, especially any where loss inflationary factors become an issue, should only serve to help maintain the momentum in reinsurance pricing even further.