Third-quarter 2017 catastrophe losses are likely to erode the reinsurance sector’s earnings and become a capital event for the space, resulting in rate increases of up to 5% at 1/1, according to rating agency Standard & Poor’s (S&P).
Global reinsurers have started to release loss estimates for the third-quarter of 2017, in light of the impacts of hurricanes Harvey, Irma, and Maria, and the Mexico earthquake events. At the same time, there’s still a chance for further storm activity in the remainder of the Atlantic hurricane season, and reinsurers are keeping a close eye on the devastating California wildfires.
As a result of the events, the industry in the third-quarter alone is expected to experience catastrophe losses of more than $100 billion, which suggests reinsurers’ capital levels could take a hit, said S&P.
S&P expects Q3 2017 cat losses of more than $100 billion to wipe out reinsurers’ annual earnings and potentially hit their capital, and while the sector’s strong capital levels through the opening half of the year will mitigate the impact, the rating agency expects to take some negative rating actions on outliers.
As a result of the dislocation in the market, the ratings agency has revised its pricing outlook for the upcoming January 1st, 2018 reinsurance renewals.
“Prior to the recent catastrophic events, we expected a 0%-5% rate decline into 2018, but our view has shifted and our current sentiment is for 0%-5% of rate increase in global pricing at the upcoming Jan. 1 renewal,” explained S&P.
Individually, none of the events were significant to have had a substantial impact on pricing in the sector, but combined, S&P expects the events to be a capital event for the reinsurance industry.
“Therefore, given the magnitude of the losses, we expect reinsurers to hold flat on pricing at the very least, but most will likely demand higher risk premiums at this time,” continued S&P.
Furthermore, unaffected regions, such as Europe and Asia, are less likely to experience rate increases, according to S&P.
The alternative reinsurance market, an expanding sub-sector of the global reinsurance industry, is also likely to experience rate increases at 1/1, “although the amount of price increase will depend on the supply-demand relationship and may take some time to play out,” explained S&P.