The series of recent catastrophes in Mexico, the U.S. and the Caribbean will generate more opportunities for the reinsurance industry as they demonstrate its necessity as a protection for primary risk bearers, and as an efficient tool for managing large-scale capital events.
The recent loss events have the potential to make the third-quarter of 2017 one of the costliest in the re/insurance industry’s history.
According to A.M. Best, total catastrophe losses of U.S. $75 billion would mean a combined ratio of 106% for the world’s top 20 reinsurers.
David Priebe, Vice Chairman, Guy Carpenter (GC), said; “The value of reinsurance as a capital substitute was very apparent during the 2008 financial crisis.
“The reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility.
“Now, the recent series of catastrophic events – earthquakes in Mexico, Hurricanes Harvey, Irma and Maria – is reminding cedents that reinsurance is also one of the most effective ways to protect corporate capital bases from these events.”
Although so far carriers’ solvency appears sound, earnings will be impacted and in some cases firms’ will see excess capital positions and catastrophe budgets eroded.
With the reinsurance segment picking up a large part of the tab for the recent events, its demonstrated its indispensability as a safety net that protects the solvency of risk bearers.
“The U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another USD 435 billion, so the sector is well positioned to absorb such losses,” Priebe adds; “But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last rate increase after Hurricane Katrina, we do not expect a similar price revision this time around.
“Reinsurers have built up capital during the recent favorable years, while capital-market investors seeking non-correlated investments have put record amounts of money into catastrophe coverages.
“Harvey on its own is likely an earnings event that will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquakes in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity – and, of course, depending on the final numbers – the aggregate impact may be a one-time firming of rates, halting decreases that recently began to moderate as reinsurers approached technical pricing floors.”
“Insurance-linked securities which provide USD 80 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity,” Priebe explained; “The earthquake and hurricanes also provide an opportunity to define the viability and effectiveness of the 144A product. We expect that these instruments will demonstrate their effectiveness and serve their intended purpose.”
The Guy Carpenter executive said he expects the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms, as “industry capital is at an all-time high and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation.”