The market is increasingly confident that industry losses from recent Japanese typhoon Hagibis and also 2018’s typhoon Jebi will ultimately stabilise below the top-end of estimates, good news for those that reserved conservatively and for those for who Jebi loss creep has been a significant issue.
Reinsurance companies, insurance-linked securities (ILS) funds and retrocessionaires will all be delighted with the news that typhoon Hagibis may not be the $15 billion or so industry loss that was once feared.
At the same time, these companies will be equally pleased that the loss creep from 2018’s typhoon Jebi may now be over, as the market begins to see this industry loss also settling just below the highest-end of expectations.
After the loss creep experienced with typhoon Jebi, which saw estimates rising by as much as $10 billion as the claims piled up, the industry had been anticipating a similarly high level of exposure to typhoon Hagibis.
But while the estimates have ranged to as high as $15 billion or $16 billion for Hagibis, a similar level that Jebi estimates ended up, many in the market are now anticipating that the eventual market-wide impact is a little lower, at between $10 billion and $12 billion it seems.
That will be a relief for the market, although the high loss estimates some issued have served to drive greater uncertainty in the retrocessional reinsurance market, which has influenced the renewals, our sources said, raising questions about the motives of some.
Following a trip to London where they spoke with underwriters and brokers, analysts from JMP Securities believe that typhoon Hagibis is set to deliver a final insurance and reinsurance market loss under $12 billion and say the market already sees this loss stabilising.
After the experience of typhoon Jebi, which continued to deliver loss creep through the third-quarter of this year, that will be a significant relief.
Of course the Jebi experience helped market participants to set more accurate and reasonable loss expectations early on with Hagibis, which has aided the much more rapid stabilisation.
In addition, the analysts said that the market is now discussing typhoon Jebi as also stabilising, with a final loss likely in the range of $13 billion to $14 billion, so below the previously held up to $16 billion top-end of estimates.
If these two storms do stabilise around these levels, they will still be the two most costly insurance and reinsurance market losses in history from Japanese typhoons.
Interestingly, the higher loss estimate and reserve disclosures some companies made for typhoon Hagibis could have a number of motives behind them.
First, driving rate in the retrocession market by raising fears of a Jebi repeat and ultimately causing more capital to be trapped, could benefit some players looking to capitalise on market dislocation at the 1/1 renewals, it seems.
That’s unlikely to be the sole driver though.
JMP Securities’ analysts also feel some re/insurers could have holes in their reserves they needed to fill, likely hailing from casualty lines, with Hagibis presenting a perfect opportunity to boost overall reserve adequacy when the market was expecting another near record typhoon loss.
Of course there is also conservatism to consider. But some of those reserving at the highest levels for Hagibis are known to be among the most accurate at reserve setting, so it’s not as clear-cut as saying they must have had an ulterior motive.
Finally, while signs and market sentiment suggest that the losses from both Jebi and Hagibis are stabilising, there is still the potential for creep to emerge with the more recent storm.
There are some in the market who fear typhoon Hagibis could still see loss creep emerging after the April 2020 reinsurance renewal, once primary carriers fully true-up on their losses.
But as reports increasingly suggest that claims are not coming in as fast as expected, such as AIG’s reveal, it has to be hoped that the market really does have a better handle on the typhoon Hagibis loss than it did with Jebi at a similar stage in its development.