29 December 2017Insurance

HIM transformed the insurance landscape in 2017

The natural catastrophes which struck North America represented the most important development in the non-life re/insurance sector in 2017, according to executives interviewed by Intelligent Insurer for our year-end questionnaire.

Hurricanes Harvey, Irma and Maria (HIM), together with two hurricanes in Mexico and the wildfires in California, are expected to have caused more than $100 billion in insured losses.

“Without a doubt the biggest story of 2017 for non-life insurance, particularly in reinsurance, was the return of significant catastrophe loss events after almost five years of more benign losses following Hurricane Sandy in October 2012,” said Brian Schneider, senior director of Fitch’s Insurance team.

The significant losses are expected harden rates in the renewals, which have been under pressure for several years due to overcapacity in the market.

“The reinsurance industry holds significant excess capital and is well positioned to absorb the losses from recent catastrophe activity given the industry's very strong capital levels at the beginning of 2017,” Schneider noted. “As a result, most rated entities remain well positioned to take advantage of any pricing improvement at the January renewals and beyond. However, for some re/insurance companies, the 2017 catastrophe losses constituted a capital event, and as such they may be less able to capitalize on improved market conditions,” Schneider explained.

The significant third quarter catastrophe losses will push the global reinsurance sector to an underwriting loss for the year, with a forecast 2017 aggregate reinsurance combined ratio of 110 percent for Fitch’s universe of monitored reinsurers. This is the weakest underwriting result since the 113 percent posted in 2011 when the re/insurance industry experienced record insured losses from multiple significant global catastrophe events, including the Tohoku earthquake and tsunami in Japan, New Zealand earthquake and Thailand floods. Earnings from investments and operations outside of non-life reinsurance will likely enable the group to produce positive earnings for the full year, with a net income return on equity projected at 2.1 percent in 2017, down from 8.5 percent in 2016.

The property/casualty market has been experiencing a soft market for several years, partially driven by the absence of large losses, but also by investors seeking higher yields in a historically low interest rate environment, finding an opportunity in the re/insurance sector. The alternative risk sector which includes insurance-linked securities (ILS) has grown substantially in recent years. Alternative capital is expected to remain an important market player even after the significant losses of the third quarter.

Stephan Ruoff, CEO of Tokio Millennium Re, said: “Hurricanes Harvey, Irma and Maria, as well as other catastrophic events in the third and fourth quarters of this year, such as the California wildfires, have further tested the third-party capital business model globally, which has demonstrated well its co-existence with the traditional reinsurance model. Global market resilience has increased as compared to previous strong catastrophe-prone years, and a $100 billion impact has been handled seemingly well.”

The third quarter losses have also tested the traditional re/insurance sector, which has also coped well, according to Kelly Lyles, chief executive client & country management, insurance at XL Catlin.

“The cat events that took place in 2017 shone a bright light on the insurance industry and put claims front and centre. It was an opportunity to showcase the talent pool in claims and demonstrate our industry’s ultimate value.

“The feedback I’ve heard from clients and brokers has been consistently positive. I’m proud of how our own claims teams performed – professional, efficient and responsive. I’m also pleased with how the industry overall has stepped up. There have been many instances, for example, of assigning a single loss adjustor to work on behalf of multiple insurers to facilitate a fast and effective response.

“These events also tested our ability to go above and beyond. When all communications were down in the Caribbean, for instance, our clients were nonetheless surprised when our exclusively retained crisis response consultants, S-RM, turned up on their doorsteps to check if they needed any assistance,” Lyles said.

The material losses of the third quarter are not only expected to increase rates in the affected regions, but also in Europe, according to Moody’s vice president and senior credit officer Benjamin Serra.

“Although these events did not materially impact European primary insurers, they impacted reinsurers significantly and will likely affect 2018 reinsurance renewals, including those in Europe,” Serra said.

The third quarter loss events are likely to go down in history because of its significant size.

“There is no doubt that HIM was the stand-out series of events in 2017,” said Iain Bremner, managing director, Barbican Managing Agency.

“While there is still a degree of uncertainty regarding the final insured loss total from these hurricanes, the combined figure will undoubtedly position it amongst the largest accumulated losses to hit the market. The most significant knock-on effect of HIM will be the impact on rate developments at 1/1 and the extent to which these can be converted into a longer-term positive pricing event. It also provides the first major test of the resilience of the ILS market,” Bremner said.

The ability to take advantage of potentially rising rates will depend on the availability of capital which may differ between market participants.

Julian Tighe, Asta CEO, said: “The catastrophes of 2017 were not a market-turning event in the classic sense, not like the dramatic losses of 2005 or 2001. However, they have had a subtle and emerging impact on the behaviour of the market. One effect is on capital and liquidity.”

The effect on capital and liquidity is driven by three phenomena, according to Tighe.

For one, existing capital providers are reloading after the impact of the storms, earthquakes and fires. In addition, all capital providers are displaying caution over the entities and classes to which they choose to deploy capital, as they see the opportunities in a pricing uptick. In addition, Tighe mentioned changes in Tier 1 and 2 capital requirements for Lloyd’s operations. Backers must fund 10 percent of their capacity in cash for 2018, 20 percent for 2019 and 25 percent for 2020.

“Capital is plentiful, but not readily available or deployable. Those with easy access to plentiful liquidity have a significant advantage over others in the market ahead. Trade and alternative capital alike are interested in investing in insurance, but they may be more enthusiastic about new opportunities, rather than refinancing existing businesses,” Tighe said.

But overall, market rates seem to be on the rise. Many underwriters are keen to protect their underwriting position while the full impact of events is played out and absorbed, Tighe noted.

“We have seen a notable uplift in the rating of loss-effected contracts, and as time has passed, the hurricanes and other cat events have hardened sentiment. The market is displaying a strong desire to halt reductions across the board, and we see evidence of a small uptick in rates, 5 percent or so, in non-cat-exposed lines,” Tighe said.

The Lloyd’s market has been hit severely by HIM. It estimated a total commitment of $4.8 billion for hurricanes Harvey, Irma and Maria. By November-end the Lloyd’s market had paid $1.7 billion in claims.

“A very positive story to emerge from 2017’s catastrophe losses has to be Lloyd’s payment of claims,” Tighe said. “The response has been excellent, and will prove a great advertisement for the market. We have very few proof points for the value of the insurance product except in the prompt payment of valid claims. They convert our promise to pay into action. The market effort to ensure that claims are paid promptly has been significant and successful. It will serve us well.”

The third quarter losses have also impacted marine insurance providers like Skuld.

When talking about 2017, “it is hard not to mention the various weather-related catastrophes and casualties in the Caribbean and the North Sea,” said Ståle Hansen, president and CEO, Skuld.

Skuld’s contingency reserve reached a record high of $421 million in the first nine months of 2017, up 15.6 percent compared to the same period of 2016.

But on the rate front, the outlook may be improving. “We witnessed positive developments in the hull & machinery market. More broadly, it is likely that we saw the trough of the cycle in 2017,” Hansen said.

Some believe, the recent cat losses will act as a turning point for the market.

“Recent events will have a material impact on balance sheets, and as this is potentially a capital event for many exposed markets, it will surely act as a turning point,” said Adam Safwat, vice president, underwriting & business development of IGI.

“Insurance and reinsurance has been inadequately priced for years, with pricing heavily influenced by brokers. Now the market is faced with circa $100 billion of accumulated aggregate losses, with some companies in the market seeing operating earnings and reserves completely wiped out by the third quarter losses. This will undoubtedly have a huge impact,” Safwat said.

While rate rises are expected it remains less clear if these will materialise across the board.

“After any major loss, there is always a debate around how connected the global insurance and reinsurance markets are, however, believing in one huge interconnected pool of global capital does not work in practice, but sensible underwriting across the board does,” Safwat noted.

“How the markets react to the current dynamics will be telling and I hope, a wakeup call for the industry,” he added.

This is just a snapshot of what executives told us in our Christmas questionnaire. For the full comments from all 16 executives that took part in our survey, please click  here.

More on this story

29 December 2017   On the life insurance sector, a flurry of mergers & acquisitions has defined 2017, according to executives interviewed by Intelligent Insurer for our year-end questionnaire.

More on this story

29 December 2017   On the life insurance sector, a flurry of mergers & acquisitions has defined 2017, according to executives interviewed by Intelligent Insurer for our year-end questionnaire.

Intelligent Insurer
Newton Media Ltd
Kingfisher House
21-23 Elmfield Road
United Kingdom