Irma losses will reveal resolve of ILS investors as industry braces itself
As the US braces for Hurricane Irma, the re/insurance industry is preparing itself for the fallout from what could be one of the most costly losses to hit the industry in decades—and the big question is how alternative capital providers will react if losses escalate.
With some 13 catastrophe bonds at risk of being triggered, events over the next days and weeks could go some way to answering the question of whether investors will stick around in the aftermath of a big loss, or will instead be spooked by the reality of a loss of capital.
Most expect the losses to harden rates, but the extent to which this happens could very much depend on whether capital withdraws from the sector following severe losses.
One analyst told Monte Carlo Today: “The wild card now is the reaction of the sources of alternative capital. In theory, they know what they are exposed to so post event, why wouldn’t you take the same risk again, especially if you get paid a bit more for doing it the second time around?
“Will the reality of a loss change that? We may now see.”
According to the US National Hurricane Center, Irma is expected to make landfall in the US today (Sunday, September 10) as “an extremely dangerous major hurricane that will bring life-threatening wind impacts to much of the state, regardless of the exact track of the centre.”
While it is too early to predict anything accurately, the industry has been trying to make sense of what losses from the storm could look like.
According to a report published by S&P Global Ratings, No respite for re/insurers as Hurricane Irma prepares to give a big jolt, Hurricane Irma could potentially cause much higher insured losses than its predecessor Harvey, resulting in a capital event for re/insurers.
“Strong capitalisation will help mitigate the impact, but Irma will likely stress-test not only the re/insurers but also the staying power of third party capital,” said S&P Global credit analyst Hardeep Manku. “Regional pricing is also likely to harden, but the impact on global re/insurance pricing is debatable.”
S&P claims that up to 13 catastrophe bonds might be at risk of being triggered or incurring a reduction in the retention layer from Hurricane Irma, ranging from the $250 million Kilimanjaro Re, which extensively covers Florida and other parts of the southern US, down to the $70 million Residential Reinsurance.
Eye of the storm
AM Best has also stated that the storm might have a serious impact on the market. In a report issued as Irma approached the coast of Cuba the rating agency said: “The potential for catastrophic property losses is a very real possibility in Florida, where officials have issued mandatory evacuations.
“Although the strength of the wind should not be overlooked, Irma will also include a significant storm surge that could result in widespread catastrophic flooding. The storm surge has reportedly been as high as 20 feet in some of the Caribbean flooding.”
AM Best pointed out that if the track and intensity of the storm continue as expected Irma will fall under the category of an extraordinary event, making it one of the worst hurricanes to make landfall in the US.
“Although the extent of the financial impact will depend on the storm track and the damages inflicted, the majority of reinsurers will incur losses from this event,” the AM Best report continued.
“Should Irma’s impact amount to an insured industry loss above $75 billion, the reinsurance sector will likely to incur a meaningful underwriting loss for the full year and experience a modest loss of capital. Reinsurers that have historically specialised in property-catastrophe reinsurers, or are more US-centric and have maintained their risk appetites for Florida and Caribbean property-catastrophe risks, are likely to be disproportionately more impacted by these losses.
“RenaissanceRe, Everest Re, Validus Re and Lloyd’s have historically committed a significant amount of capacity to this market. However, over the past few years, all reinsurers have started pulling back capacity or are increasingly using retrocessional protection—much of it from capital market vehicles—to reduce exposure, given that pricing conditions in the property-catastrophe market have deteriorated.
“AM Best expects the impact to reinsurers’ earnings to be more pronounced as a result of the price erosion.”
According to global property analytics provider CoreLogic an estimated 8.5 million residential and commercial properties in Florida are at either “extreme”, “very high” or “high” risk of wind damage from Hurricane Irma.
CoreLogic’s storm surge analysis shows that an estimated 3.5 million residential and commercial properties in Florida are at risk of hurricane-driven storm surge damage. Neither analysis includes potential damage from inland flooding.
Irma has already caused an estimated €1.2 billion ($1.4 billion) in damage to the islands of Saint Martin and Saint Barthélemy, according to the French State reinsurer CCR, which stated that: “This amount includes damages to residential buildings, vehicles and businesses (including business interruption losses) that are covered by the French Natural Disaster compensation scheme. This natural disaster loss, one of the costliest to affect France in 35 years, will be covered by CCR and insurers’ reserves booked to this effect.”
Irma comes just a week after Hurricane Harvey, which severely impacted south-eastern Texas and caused significant flooding in the Houston region. According to an initial report by Aon, Harvey could be one of the costliest natural disasters on record for the US economy.
Aon said: “Total economic losses were estimated minimally to reach the tens of billions, ensuring that Harvey is likely to become one of the costliest natural disasters on record in the US. Preliminary published reports suggested that insured losses—including those paid by private industry and the US National Flood Insurance Program—were likely to well exceed $10 billion.”
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