So, major hurricanes are like buses- you wait for ages for just one, then 3 or more of them come along at once.
Of course, the human and economic cost of Hurricanes such as Harvey, Irma and Maria (or of the Mexican earthquakes) has been devastating; and those affected deserve all the support available.
However, while the (re)insurance industry thought it had had a narrow escape when Irma’s path managed to miss Miami, Maria’s impact brought home with a vengeance how Nature often manages, once again, to prove that CAT models are simply that- models, making a mockery of stated Risk Appetites or Tolerances. The growing catalogue of profit warnings and earnings revisions demonstrates that point very clearly, with rumours that some retro markets may see loss ratios that will make their managements wonder why they ever thought writing such business was a good idea.
The first half of 2017 has already been a relatively weak one in terms of industry profitability and underwriting results; and, while the range of loss estimates for Q3 CAT is still broad, if claims payments reach the USD 150BN level, that will be roughly the equivalent of 1 year’s gross premia for the global reinsurance industry, as a senior Scor executive recently pointed out- and multiples of annual net underwriting income.
So, what is the good news? That the industry has ample capital of some USD 600BN (although that is distorted to some extent by the size of Berkshire Hathaway’s capital base), even if certain markets (such as Lloyd’s) are likely to be disproportionately affected.
And the bad? That, contrary to hope and expectations, the combined costs of Q3’s CAT events may still not be enough to reverse trends and materially harden the market beyond an initial period, unless the sources of alternative capital (currently making up some 14% of the USD 600BN) take fright; decide that the “non-correlated-returns” thesis is no longer valid, and so pull back from replenishing their investments. This will mean a continuation of the uncertainty of trying to generate premium flow that has margins about technical levels.
However, if past behaviour is predictive, there are likely to be at least some new “Class of 2017” entities created to take advantage of potential changes, and, if rates do rise for any period of time, it seems highly likely that fresh alternative capital will be provided- yet its arrival may well cause a further softening.
As a result, all eyes will be on the January 1st renewals, and whether the industry’s underwriters will be sufficiently disciplined to impose rate increases that reflect the impact of 2017’s losses on profitability and capital- although that will only affect one business line, not all the other, commoditized ones where pricing is still deteriorating, or at best stabilizing at marginal levels.
Although Awbury does not write any NatCAT business, we shall be carefully looking for second and third order effects (such as whether there are still-hidden pockets of overly-concentrated retentions within the industry). Importantly, recent events should continue to reinforce the point that our core E-CAT (economic, financial and credit catastrophe) franchise remains the source of highly-attractive, truly non-correlated, risk-adjusted returns for our reinsurance partners.
The Awbury Team