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Peel Hunt warns of modest hurricane losses as Harvey approaches Texas

24th August 2017 - Author: Luke Gallin

As Tropical storm Harvey continues to track towards the state of Texas, analysts at Peel Hunt have warned that despite the benign catastrophe experience witnessed in 2017, so far, a series of modest hurricane losses could push some Lloyd’s players to a loss as the soft market persists.

Hurricane image from the Space StationAccording to the National Oceanic and Atmospheric Administration (NOAA), Harvey continues to track towards Houston, Texas, U.S., and could make landfall within the next 48 hours as a hurricane, with wind speeds of between 74-110mph.

During this time of year the Gulf of Mexico warms, and as a result it’s expected that Harvey’s wind speeds will increase as it approaches Texas.

Should Harvey develop into a hurricane it would become the third landfalling U.S. hurricane of 2017, says Peel Hunt.

Throughout 2017 and at the recent mid-year renewals rates across the global reinsurance sector have continued to decline, driven by excess capacity from both traditional and alternative sources, the prolonged absence of a major loss event, and intense competition.

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In light of this, insurers and reinsurers in the Lloyd’s market, and elsewhere have struggled to find a pricing floor, with rates falling further at the June/July renewals than some had anticipated.

“A fairly broad-based rate weakening across both property and casualty (0% to -10%) lines so far this year is exposing underlying margin pressure, which has so far been glossed over by a benign catastrophe season. A major hurricane is unlikely to turn the cycle. However, a series of smaller events that fall within retentions could force carriers with slim margins into a loss, triggering cutbacks and a stabilisation of the cycle,” explains Peel Hunt, in a recent Lloyd’s insurers market communication.

Insurance and reinsurance market commentary throughout the softening cycle has suggested that a large loss event is needed to remove a sufficient amount of capital from the space, resulting in rate increases and ultimately a turn in the market. But with the unprecedented high levels of alternative capital entering the space, supported by the growth of the collateralised reinsurance and catastrophe bond market, it’s unlikely that a major hurricane would be sufficient.

However, a series of smaller or medium sized events might well be enough to push some into the red. Especially with reserves reportedly thinning and the persistent low-interest rate landscape, which is dampening investment returns for insurers and reinsurers.

And with forecasters predicting an above-average level of Atlantic Tropical Storm & Hurricane activity for the 2017 season, driven in part by a lower chance of El Nino conditions developing, some players in Lloyd’s could find themselves in a very challenging position.

You can see the current position and forecast path for tropical storm or hurricane Harvey below:

Tropical storm or hurricane Harvey forecast

Tropical storm or hurricane Harvey forecast

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