Following the impacts of hurricanes Harvey and Irma, in a year that has also seen significant U.S. convective storm activity and events like Cyclone Debbie in Australia, reinsurers are now in a position where one more major hit from a hurricane or other catastrophe could put their balance-sheets at risk.
The same goes for insurers, according to analysts at Credit Suisse, who believe that some insurance and reinsurance firms are getting to the stage where their reinsurance and retrocession has been eroded significantly enough that another storm could erode their capital base.
Hurricane Maria is now moving beyond the Caribbean as a still dangerous storm today, but the forecast path suggests it is unlikely to trouble the United States coastline, although there is still some uncertainty in the forecasts, and any shift westwards could take Maria perilously close to the U.S.
The analysts believe that so far the discounts on insurer and reinsurer share prices are likely greater than the impacts that Harvey and Irma combined will have, given the excess capital in the reinsurance sector.
However, it may only take one more storm for the outlook to look less rosy.
“For both the primary and the reinsurers, there is also the reality that the “next” hit poses more potential balance sheet risk (all things being equal) than the last, because in some cases reinsurance layers may have been depleted,” the analysts explained.
Some companies will be replacing depleted reinsurance layers just as quickly as they can, while others may choose to ride out the rest of the season with a reduced complement of coverage.
As the reinsurance or retrocession layers erode the balance-sheet capital of the insurer or reinsurer becomes increasingly exposed to any further major loss events, including hurricanes such as Maria should it take a turn towards the U.S.
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