16 October 2017 Insurance

HIM losses an earnings event for reinsurers

Despite losses from the recent hurricanes set to exceed $100 billion, AM Best still expects the losses to have only a limited impact on the sector’s capital, making this an earnings event more than a capital event for the overall US property/casualty industry.

That is according to John Andre, managing director, property/casualty ratings, who told PCI Today that AM Best has conducted a number of scenario tests to determine the impact of the losses.

“AM Best expects a loss of about $30 billion to its rated composite of the world’s largest reinsurers. The ultimate impact of the industry loss will depend on, among other factors, cedants’ retention levels, as well as the amount of losses absorbed by the capital and collateralised markets,” he said.

For rated reinsurers, the aggregation of these three hurricane events could be both an earnings event and a very minor capital event that would be well inside management expectations. However, those insurers with large market share and reinsurers that have historically specialised in property-catastrophe reinsurance or are more US-centric are more likely to be disproportionately impacted, he noted.

He stressed that AM Best does not expect a significant number of rating actions to result solely from these hurricane events, but could view these events as a market mover for reinsurance pricing and for certain classes of insurance business in the US.

For primary insurers, AM Best will be looking at how reinsurance programmes respond. This is particularly true for local companies conducting business in the Caribbean and Florida, which rely heavily on reinsurance.

Ultimately, cash calls and liquidity will play an important role as rebuilding efforts begin. Although the aftermath of Hurricane Irma may be bleak for some regional and local carriers, particularly overexposed companies with earnings and potential capital concerns, AM Best believes opportunities may emerge for others, Andre noted.

He added that it was still too early to assess losses on some lines of business and that the overall losses could impact pricing in the market.

“The industry still needs to get its arms around the weather losses from hurricanes Harvey, Irma and Maria (HIM), including business interruption losses, which are often difficult to completely determine. AM Best will be looking to see if there is any corresponding price hardening, however brief, for both insurers and reinsurers.

“Outside of the HIM losses, we will carefully observe the improving trends in other lines such as private passenger auto liability, commercial auto and workers’ compensation.”

He stressed that the property/casualty market remains challenging for re/insurers across the board and will remain this way for the immediate future.

“The market has been very competitive for years and that is not changing in the current market environment,” Andre said.

“The industry, on an aggregate basis, is very well-capitalised, with very low underwriting leverage. This leads to the fierce competition and fairly low premium growth in recent years.

“Among the other competitive forces are diminishing reserve releases, low investment yields and outsized catastrophe losses. The cat losses in the first half of 2017 were exceptionally large, especially in the personal lines segment. The HIM losses will only further dampen results.”

Some improvements are emerging, however. According to Andre, personal auto business, which had been challenged in recent years by increases in the frequency and severity of claims compounded by rising repair costs, has shown some improvement.

Rates have increased, leading to a strong growth in direct premiums written for auto liability and auto physical damage.

Pricing competition remains intense in most commercial lines with very little top-line growth over the past few years. In commercial auto, rate increases have accelerated but adverse reserve development continues.

In workers’ compensation, AM Best has noticed slowing premium growth but reserve development remains favourable and calendar year direct loss ratios are still improving.

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