The fear factor will determine rate hikes
While the industry has enough capital to handle the losses from the recent hurricanes, even at the higher end of estimates, it will be the psychology of the market that will determine potential changes in rates, with the fear factor having an important role to play, Brian Schneider, Fitch Ratings’ global head of reinsurance, told PCI Today.
“A potentially record year of catastrophe losses can be absorbed by the very strong levels of industry capital. However, it has the potential to change the psychology of the market such that pricing stabilises and even increases at the renewals,” Schneider said.
“At a minimum, loss-impacted areas are likely to see double-digit hardening in pricing. The amount and length of any potential pricing movement will depend on how much capital is removed from the market, including from insurance-linked securities (ILS), as well as how much fear these hurricane events create in the market.
“The biggest potential price increase may be in the retro market, which is expected to suffer significant losses and is dominated by ILS capacity.”
Schneider added that much will also depend on how third party capital reacts to losses. He noted that the recent catastrophe events will result in losses to the alternative reinsurance market and could test the willingness of the ILS market to pay some claims.
“This will particularly be the case for collateralised re, which has been largely untested by a loss event, having grown significantly since 2011,” he said. “Also, collateral will be locked up beyond year-end as issues are sorted out and potentially litigated.
“There is also the question of the ability of the ILS market to reload into 2018. We expect this to occur given the amount of capital looking to enter if ILS rates were to increase. In particular, family offices and endowment funds have been showing more immediate interest than pension funds.”
He said that most US insurance companies and global reinsurers rated by Fitch are not expected to be downgraded as a result of the recent catastrophe losses as the events are expected to constitute a material earnings event, but not a capital event, for most companies.
However, he also noted that select companies with disproportionate combined losses that weaken capital could see ratings downgrades if losses are not addressed through capital raises or other mitigating actions.
“Within our ratings coverage, global reinsurers are likely to be the most exposed to these events. However, some larger diversified primary insurers in the US and select players globally are also at risk.
“The greatest threat to ratings would be in cases where losses materially exceeded a re/insurer’s modelled estimates, which could indicate some weaknesses in risk management processes,” he said.
Schneider added that, once the dust has settled on claims and the market’s reaction to the losses, the biggest legacy of Harvey might very well be the protection gap that was revealed in such a highly developed market.
He noted that RMS estimated $18 to $25 billion of insured losses (excluding National Flood Insurance Program losses of $7 to $10 billion) for Harvey, which is only a fraction of the estimated $70 to $90 billion economic loss.
“This is primarily due to Harvey’s being much more of a flooding event, which has more limited coverage by private insurers. As a result, it is likely that the US government will to seek to transfer more flood risk to the private markets, including ILS, providing an opportunity for insurers,” he concluded.
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