JLT Re expects the recent spike in insured loss activity to change perceptions of risk and the overall mindset of the market as well as impact property catastrophe pricing.
The broker said in its latest Viewpoint report the market will feel a considerable impact of the combined total losses for Harvey, Irma and Maria – after their widespread damage blew a hole through reinsurers’ catastrophe budgets, hitting earnings and even absorbing a portion of excess market capital.
This is expected to raise property catastrophe pricing as well as cause firms to more actively consider their exposures and increase reinsurance and retrocession purchase.
Costly natural or man-made catastrophes have historically had a significant bearing on reinsurance rates, particularly for property catastrophe business.
Although property catastrophe lines are expected to increase slightly, JLT Re noted these will be moderated compared to those in the 1990s and early to mid 2000s as the market dynamic has shifted with firms boasting stronger capitalisation.
Expectations are still that losses from the three hurricanes will fall within modelled parameters.
“After years of subdued losses, the catastrophes of 2017 could encourage carriers to assume higher loss experiences in future years, instead of relying on good fortune to persist indefinitely,” said JLT Re.
“Irma showed that a $100 billion or $200 billion loss involving a major hurricane hitting a metropolitan area is not only the domain of Hollywood, but a reality that requires serious consideration and risk mitigation action,” said JLT Re, “Maria also surprised many by causing tens of billions of insured damage without making landfall on the U.S. mainland.
Both Irma and Maria generated interest in back-up cover, suggesting some cedents recognised they are over-exposed and under-reinsured for such outcomes.
JLT Re said it’s therefore “hardly surprising that some carriers have sought additional reinsurance protection for the remainder of 2017.”
Low loss activity since 2012 has been one of the key contributors to the sustained soft market environment – light catastrophe years have boosted reinsurers’ results, contributing to artificial returns on equity.
With a number of reinsurers already struggling to generate returns above their cost of capital in a low loss environment, JLT Re warned that any further deterioration in loss experiences will seriously challenge profitability.
