As hurricane Harvey continues its track towards the state of Texas as a Category 2 storm, expected to intensify to a Category 3 storm as it makes landfall late Friday or early Saturday, the expected loss remains uncertain. However, J.P. Morgan expects roughly 50% of the insured loss to be covered by reinsurance protection.
Typically, J.P. Morgan expects 50% of the insurance industry loss from such a storm to be passed onto reinsurers, although for a very large event this does have the potential to be higher. So far, and in light of uncertainty surrounding the path of hurricane Harvey and its expected intensity when making landfall, economic and insured loss estimates are yet to be reported.
For Europe’s big four reinsurance players, J.P Morgan explains that Swiss Re and Munich Re have the highest exposure, at 10%, of which 90% will be retained. Hannover Re’s exposure is 6% with a 75% retention, while SCOR’s exposure is estimated to be at 4%, with a 75% retention.
J.P. Morgan analysts combined the potential net loss for Europe’s big four players, and then compared this to its full-year 2017 expected net income and book value estimates.
The analysis shows that a $5 billion insured loss total may result in an average impact to net income of 7% for the four reinsurers, increasing to 13% of net income with a $10 billion loss. Should Harvey drive insured losses of $20 billion, the impact to net income would be an average of 27% for the group, rising further still to 40% of net income in the event of a $40 billion insured loss.
Interestingly, J.P. Morgan compares the above figures to the estimated remaining catastrophe budgets of the group. Catastrophe losses in H1 were at or below cat budgets across the industry, which suggests that cat budgets for the second-half of the year are untouched, says J.P. Morgan.
Analysis reveals that a $10 billion event “would be unlikely to exhaust the remaining natural catastrophe budgets across the sector, with a larger loss of $20bn-30bn required to cause an overrun,” reveals J.P. Morgan.
Ultimately, J.P. Morgan states that any loss is unlikely to drive a capital hit to the sector, and instead is more likely to be an earnings event.