At an estimated $100 billion, Q3 re/insurance losses could hit records, but with just $30 billion of this reported in company losses, so far, investors are concerned over the potential knock-on consequences the giant $70 billion loss gap could have on the market.
A recent Morgan Stanley report said the gap could lead to carriers’ having to significantly increase their current estimates, or could mean industry losses are much smaller than risk modellers thought, which would dampen the widely predicted potential pricing upturn within affected lines of business.
Morgan Stanley analysis investigates which segments of the market and which carriers are likely to still report losses that could fill the gap, estimating $40 billion unreported losses from re/insurers, and $12 – $18 billion losses from alternative markets.
“Our estimate is composed of: Harvey primary losses – primary insurers which have disclosed Harvey losses account for 24% market share of catastrophe exposed lines in Texas.
“They collectively reported $4b losses which implies $12b unreported Harvey losses,” said Morgan Stanley.
State Farm, Farmers, USAA, Liberty, Berkshire, Texas Farm, and Nationwide are among top 10 underwriters in Texas with a collective 43% market share.
Unreported Hurricane Irma losses are estimated at $14 billion, while Maria primary losses could range from $10-$15 billion.
Global reinsurers reported $18 billion of 3Q cat losses, which, “could be extrapolated to another $12 billion of unreported losses. Hannover Re, Berkshire, and Alleghany alone account for 15% of market share and could add $5 billion of losses.
“We note that there could be double counting as some reinsurers losses include both primary and reinsurance segment.
“We use $5 billion as unreported reinsurance losses. One additional item is reinstatement premiums. Reinsurers typically report cat losses net of reinstatements received which could add up to billions in our view.
“Alternative capital market could bear $12-$18 billion of industry losses.”
The gap between estimated and reported losses is very high due to the uncertainties still surrounding the several large, complex loss events that occurred within the quarter.
Maria losses in particular are subject to high variabilities given the limited access and potential for business interruption claims.
It’s possible that in coming months carriers will be releasing upwards revisions of reported losses, however, Morgan Stanley expects losses from unreported re/insurers and alternative capital will largely bridge the wide gap between company reports and industry estimates.
“For reference, post Sandy, various re/insurers reported $16 billion of losses, or 64% of industry estimates of $25 billion; the subsequent loss revisions for our coverage were +2% on average.
“Brighter pricing outlook could lift future earnings and drive better investor sentiment on the group,” said Morgan Stanley, echoing the consensus of an array of re/insurance experts anticipating favourable renegotiations of rates in upcoming January renewals, after the phenomenal Q3 losses broke some of the downwards pressure on pricing in the Hurricane affected lines of business.
