Despite industry statistics suggesting a benign level of catastrophe activity in the second-quarter of 2018, analysts at Deutsche Bank warn that certain events will drive negative effects within reinsurance accounts, while man-made claims could also play a bigger role than expected.
Global reinsurance giant Munich Re reported recently that overall, economic losses from natural catastrophe events in the first-half of 2018 totalled $33 billion, which is the lowest in more than a decade.
Of this, more than 51%, or $17 billion are expected to be covered by re/insurance, which, although down on last year, is still in-line with the low average for the first six months over the last three decades.
“While industry statistics suggest a benign Q2 natcat season, we believe that a few weather events (especially severe weather events in the US from late winter storms, as well as tornado and hail events) will lead to negative effects within reinsurance accounts,” explains Deutsche Bank analysts, in a recent Q2 European Reinsurance industry note.
Ultimately, analysts predict that individual nat cat budgets will be utilised by between 40% to 50%, which results in combined ratio impacts of between 2.9% to 3.5%, within Deutsche Bank’s estimates.
At the same time, analysts warn that man-made catastrophes could play a bigger role than expected, with analysts factoring in up to 4.5% for major man-made claims, within its estimates.
According to Deutsche Bank, the two largest natural catastrophe events in Q2 were probably severe weather events that hit North America. Parts of northern U.S. and Canada were hit by severe winter weather in mid-April, while a severe weather event and a series of tornadoes occurred in mid-May in the southwest U.S.
“Although we expect that the majority of these losses will stay within the primary insurance world, we would also expect some effect on reinsurers,” says Deutsche Bank.
Elsewhere in Q2, Japan was hit by a magnitude 5.5 earthquake in mid-June, although the impact on the re/insurance sector is expected to be minimal, while two volcanic events (one in Hawaii and one in Guatemala) are not expected to have any effect on reinsurers.
Oman was hit by a Category 3 storm towards the end of May, which is expected to result in economic losses in the several hundreds of millions of dollars, of which some 30% is expected to be insured.
Interestingly, Deutsche Bank analysts highlight the potential for a couple of man-made losses to become major events in Q2, which includes the Colombian dam breach and the explosion of a Wisconsin, U.S. oil refinery.
Following heavy flooding, Colombia’s Hidroituango dam breached in mid-May, which is reported to have caused extensive damage to the facility, and which media reported is an estimated $4 billion investment project that is able to generate 16% of the country’s electricity.
“There is still a high degree of uncertainty on damage and potential insured loss, as well as whether it affected insurers. Reinsurers could book this as a Q2 event with a sort of first estimate, or they might wait until Q3 in which they probably have a better view on the outcome,” explains Deutsche Bank.
At the end of April, an oil refinery explosion in the U.S. is likely to become another man-made claim, says Deutsche Bank, with business interruption potentially increasing the insured loss total.
As a result of the above, Deutsche Bank says it expects to factor in an impact from man-made losses of between 3.5% to 4.5% for its reinsurance companies, although it does stress a high degree of uncertainty on the financials.
“Combining our c.3% impact from natcats and the c.4% impact from man-made events would still not fully utilize the respective major loss budgets, but it would turn Q2 into a more loss-burden quarter than consensus might assume,” explains Deutsche Bank.
