In a new report, analysts at Moody’s have warned of the potential for pressure on both insurer liquidity and the availability of reinsurance and ILS capacity, following heavy losses from Hurricane Ian in Q3.
Moody’s notes that Florida-only property insurers manage their hurricane exposures through the extensive use of property catastrophe reinsurance.
Although these coverages bolster claims-paying resources for these firms, the rating agency cautions that insurers highly reliant on reinsurance could face a liquidity squeeze if there is a lag between the payment of insurance claims and reimbursement from reinsurers.
These companies also face the risk of a material deterioration of capital if Ian or future events significantly exceed their reinsurance limits, it added.
And they will face further challenges if the magnitude of losses from Ian causes the price of reinsurance to rise substantially in 2023, as most commentators are predicting.
For most reinsurers, Hurricane Ian is only expected to constitute an earnings event, although analysts believe that firms with outsized losses could see some pressure on their risk-adjusted capitalization, which has already seen some deterioration from large unrealized losses on fixed income securities due to the sharp rise in interest rates this year.
“In general, we believe reinsurers have sufficient liquidity in the form of cash, short-term investments, new premiums and investment income to cover claims payments relating to Ian without having to liquidate investment portfolios and crystallize such losses,” Moody’s reported.
“However, the deterioration in reported equity capital across the sector is likely to constrain available capacity for capital intensive lines like property catastrophe reinsurance over the near term,” it continued. “Likewise, alternative capital supply could also be impacted due to losses and trapped capital from Hurricane Ian.”
In the wake of Hurricane Ian and the other economic challenges facing the industry, Moody’s expects property catastrophe reinsurance pricing to increase significantly next year, particularly for loss-affected accounts in the US.
“The key wildcards at upcoming renewal periods will be the availability of retrocessional capacity, which is increasingly supplied by alternative capital vehicles, as well as the related pricing,” analysts summed up
“Given that reinsurers have been ceding more business to the alternative market, we expect this segment of the market to also experience substantial losses from Hurricane Ian. The reduction of available retrocessional capacity will result in higher retro pricing and is likely to have a ripple effect that also drives property catastrophe reinsurance rates even higher.”
