Following the impacts of hurricanes Harvey and Irma, analysts at Keefe, Bruyette & Woods (KBW) expect global reinsurers to anticipate reporting lower return on equities (ROEs) in 2018, than perhaps some had been predicting before the storms.
Industry-wide and company specific loss estimates for hurricanes Harvey and Irma are beginning to come in, although it will take some time for the full impact to the insurance, reinsurance, and also insurance-linked securities (ILS) markets is understood.
Should no more major hurricanes, or earthquakes take place for the remainder of 2017, KBW expects modest property catastrophe reinsurance rate rises in 2018 in response to Harvey and Irma.
However, in spite of likely increased property catastrophe reinsurance rates and likely lower shareholders’ equity, KBW expects “the market to anticipate lower reinsurer ROEs in 2018 than had been expected before the hurricanes,” said analysts, in a recent industry note on KBW’s meetings with the reinsurance industry in Monte-Carlo in early September.
The global reinsurance market remains under significant pressure, and ROEs have been declining, reportedly alongside reserves, during the benign loss environment. Following two major U.S. landfalling hurricanes in the month of September and the fact the hurricane season is far from over, some players could find themselves in a very, very difficult situation come year end.
Market commentary has suggested for some time that the profitability of some reinsurers was only thanks to the low-loss landscape and high level of reserve releases and, with losses appearing to become more normalised and reserves thinning, it could be an increasingly tricky time for the sector.
KBW analysts commented on the normalised catastrophe landscape; “We agree with our European colleague William Hawkins (who assembled our phenomenal Monte Carlo meeting line-up) that Hurricane Irma losses largely validated, rather than challenged, the catastrophe models. By the same token, AIR’s catastrophe model anticipates “normalized” annual global catastrophe losses of about $80 billion, well above the last decade’s roughly $55 billion average.
“We think the (very likely, at this point) emergence of an actual “above-average” year will now push the market to anticipate more normalized (i.e., higher) catastrophe losses in future years, rather than assuming that the “hurricane drought” would persist.”