12 September 2017 Insurance

Reinsurers will need to ponder options if Irma becomes capital event

If Hurricane Irma becomes a capital event for reinsurers they will have to mull over options to replenish the capital, S&P executives told Monte Carlo Today.

Hurricane Irma is expected to cause much higher insured losses than Hurricane Harvey and may result in a capital event for re/insurers, according to the ratings agency. A capital event would be defined as a reduction of 10 percent of total capital.

“If companies cannot restore in line with our base case assumption, then we may take negative rating actions,” said Johannes Bender, S&P director insurance ratings.

But reinsurers may not necessarily need to raise additional capital.

“Companies may have strong competitive positions and may be able to replenish capital over the next year or two just through earnings,” said S&P senior director Taoufik Gharib.

Bender noted that whether reinsurers need to raise capital will also depend on a company’s risk capital strategy and the capital levels it wants to achieve.

Most of the companies give out boundaries for the capital levels they want to maintain and feel comfortable with. If a reinsurer decided for a capital increase, Bender noted, most of the companies have ample access to funding. They can raise core shareholder equity, they could issue hybrid debt or other debt, or they can also play with their dividend policy, he said.

The options market players have and the price they may have to pay will depend on how comfortable investors feel about the loss. If the loss was not contemplated by the models, it might be more difficult to attract investors, Gharib suggested.

Strong capitalisation of the sector is expected to help reduce the impact, but Irma is likely to stress-test not only the re/insurers but also the staying power of third party capital.

If investors are comfortable with the loss as it is kept within the expectations, alternative capital is likely to stick around, according to Gharib.

Bender added: “The current expectation is that this event will not wash out the alternative capital entirely because it is still an interesting asset class.”

However, investors will probably request higher returns given the effects of Irma and potentially the earthquake in Mexico, Gharib noted.

Get the latest re/insurance news sent to your inbox every day -  Sign up to our free email newsletters

Today’s Monte Carlo stories

Greenlight to benefit from market turn

Schroders launches ILS life fund; Lohmann mulls effect of buffer clauses

Hannover Re sees loss-driven rate rises

Swiss Re CEO warns on true risk of cyber cover

Irma wake-up call will propel rates in right direction: Markel

Pool Re gets green light to cover cyber

Limited expertise in cyber is a concern

NFIP reform could pave way for private market to participate

Swiss Re CEO’s vision for insurance

PERILS aims to be the ‘one-stop agency’ for nat cat data

Irma to have impact on US property rates

Leadenhall earns seat with the big boys

Euler Hermes sticks with tradition over naïve capital

Don't miss our insurtech email newsletter - sign up today

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk