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Loss gap could come from greater counterparty diversification

6th December 2017 - Author: Staff Writer

With global re/insurance industry losses from Q3 2017 natural catastrophes estimated at $100 billion, and just $30 billion reported in re/insurers’ losses so far, experts have been speculating on whose pockets could yet be emptied to fill the insured loss gap.

CreditSights has said that reinsurers may have reported fewer losses this year due to a change in primary insurers’ strategy – to one that draws on a broader portfolio of reinsurance programmes to further diversify risk.

Munich Re is an excellent example as the net loss from major claims, mainly from the three hurricanes amounted to €3.2 billion, as opposed to the €4.5 billion natural catastrophe loss experienced in 2011.

“One possible reason for this new phenomenon may be that Primary insurers are spreading risk across multiple reinsurers at different attachment points to reduce counterparty risk,” CreditSight explained.

Losses from significant natural catastrophe events may be more spread out in 2017 than in previous years, with losses shared between a higher proportion of reinsurers and alternative capital sources of reinsurance like cat bonds.

“Using Allstate as an example, the insurer has multiple effective reinsurance programs, one of which is a 9-layer nationwide per occurrence program that utilises multiple reinsurers.

“Under this specific program, Allstate retains $500 million in losses from a non-Florida or New Jersey event, while a series of reinsurers share losses in excess of that amount,” CreditSight explained.

It’s possible then that insurers have been retaining a greater proportion of their losses than we have seen in previous heavy loss years.

CreditSight analysts observed that some reinsurers had reduced underwriting capacities in some P&C markets because of shrinking profitability levels due to the soft market – this could provide another explanation for the lower reported losses.

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