U.S Property and Casualty (P&C) re/insurers are well prepared for the 2018 hurricane season, which is expected to return to normal levels following an extremely active 2017 season, according to Fitch Ratings.
The rating agency concluded that U.S insurers are well positioned to withstand a future significant catastrophe event in 2018, but noted that early forecasts indicate that the environmental forces that encourage storm development remain relatively neutral and portend a near-average season.
During last year’s hurricane season, which runs from June 1 to November 30, Hurricanes Harvey, Irma, and Maria caused around $80 billion in insured losses, although a sizeable portion of these losses was shouldered by offshore reinsurers, alternative capital, and the National Flood Insurance Program (NFIP).
Moreover, insurers avoided the costs of a direct landfall in Miami by Irma, and the Florida primary insurance market reported relatively limited net insured losses when compared with the sizable gross losses that companies passed on to the reinsurance sector and alternative capital markets.
Christopher Grimes, Director at Fitch, explained: “Irma provided a meaningful test of insurers’ reinsurance programs, demonstrating the value of strong risk management capabilities.”
Reinsurers have been experiencing premium rate increases in response to 2017’s catastrophe losses, but Fitch proposed that an improved pricing environment may be short-lived due to increasing competition from capital markets.
Grimes continued: “Significant property losses in 2017 will lead to higher premium rates in loss-affected primary market segments. Market pricing data indicates that the soft market appears to have finally reached a bottom with rate increases seen in most lines, particularly commercial property and property catastrophe reinsurance business.”
Brian Schneider, Senior Director at Fitch, added: “The reality of the reinsurance market is that alternative capital competes directly with traditional capital, which limits the extent of cyclical price changes following severe catastrophe-loss years.”
Capital markets have shown sustained appetite following 2017’s catastrophe losses, with nearly $3.6 billion of CAT bonds exposed to named storms announced thus far in 2018, and few visible trapped capital effects from outstanding 2017 claims settlements.
According to Grimes, “investors remain undeterred from allocating capital to the sectors as investors continue to view catastrophe (re)insurance as diversifying source of risk.”
Fitch observed that U.S insurers generally remain in a strong position, with aggregate industry policyholders’ surplus having grown by 7.5% in 2017 to a record $765 billion, and higher total investment returns having offset elevated underwriting losses.
