Lack of new equity cash and trapped capital could mean bigger rate rises
Rates in property-catastrophe reinsurance are likely to increase more than many believe in the aftermath of big hurricane losses because of the low level of equity raising and the debut of trapped capital as a major issue.
That is the view of Michael Millette, managing partner of HSCM Bermuda (Hudson Structured Capital Management), the ILS, reinsurance and transportation finance investment manager set up by the former structured finance head of Goldman Sachs.
Millette told PCI Today that the money entering the industry has been low in comparison to previous big losses. In the aftermath of Hurricane Katrina in 2005, which caused $82 billion in insured losses, for example, some $30 billion of new money entered the industry through a mixture of new companies and existing entities. In the aftermath of 9/11 in 2001, a similar amount entered.
While new money is entering the industry through funds, sidecars and other forms of risk transfer vehicles, Millette stressed that it is nowhere near the amount needed to dampen price hikes on certain lines of business hit by big losses.
“I believe property-cat pricing will go up more than people predict,” Millette said. “Total losses from the recent hurricanes could reach around $90 billion, although it is still hard to say how much exactly, yet we are now seeing money entering the industry on the scale we have in the past. There are now new launches and equity positions are not being taken in existing companies.
“In addition to amounts lost, trapped capital will withdraw additional billions of capacity from the market. People need to factor that into their calculations when they consider rates. There is little to dampen rate increases at the moment.”
He also believes that the rate hikes could extend beyond the core property-catastrophe lines. He noted that the losses will also have an impact on commercial lines, energy and marine business. “They will see some firming as a result,” he said.
Not that less money entering the industry is a bad thing, Millette said. “If anything, the activity should be limited. There were several new companies with great teams and plans launched after Katrina backed by private equity. Few subsequently succeeded in going public, which was their original objective.”
He acknowledged that, while some investors have reacted nervously to the recent losses, most have been keen to reinvest post-loss, despite widely varying estimates from modelling firms. Loss estimates from Hurricane Maria ranged between $15 billion and $85 billion (from different modelling agencies) in the aftermath of that storm. Investors appear to have accepted that level of uncertainty in the immediate aftermath of the storm.
“The recent storms have certainly uncovered the challenges risk modelling agencies face; seeing the range in some of the estimates was surprising. It proved that certain types of loss are hard to calculate and uncovered all sorts of nuances in terms of what we actually know and can calculate.
“We also discovered that there is little agreement on what is covered in Puerto Rico,” Millette said.
He added that the recent losses and subsequent rate increases in some lines will rebalance the relative attractiveness of different areas of the market, with natural catastrophe and other property lines gaining on a relative basis.
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