JLT Re's report assesses - in the wake of the devastating triple blow hurricanes Harvey, Irma and Maria dealt the United States and the Caribbean during this year's peak hurricane season - how these events are likely to impact the reinsurance market and highlights the key differences this year compared with previous market-changing losses.
"Prior to this year's hurricane season, expectations heading into 2018 were for a softening, but moderating market. But hurricanes Harvey, Irma and Maria brought a decisive end to a five-year period of below-average global catastrophe losses. In fact, 2017 will be only the third year on record in which global insured catastrophe losses have exceeded USD 100 billion (along with 2005 and 2011). This is important because costly natural and man-made catastrophes have historically had a significant bearing on the market and we expect the losses of 2017 to change perceptions of risk going forward," Mike REYNOLDS, Global CEO, JLT Re, said commenting on the report.
David FLANDRO, Global Head of Analytics, JLT Re said, "After eight consecutive years of strong capital growth and lacklustre premiums, the reinsurance sector started the second half of 2017 with more capital relative to risk than at any time in recent memory (see Figure 1). Figure 2 illustrates the strong historical correlation between the sector's excess capital ratio and global property-catastrophe pricing. Circumstances today are considerably different to previous large loss years. It must be remembered that in 2001 and 2005, for example, the sector was respectively entering and exiting the liability crisis which, all told, cost carriers hundreds of billions of dollars worldwide. This meant that the sector's capital position was both lower and more uncertain during these years."
Figure 1: Dedicated Reinsurance Sector Capital and Gross Written Premiums - 1998 to Q2 2017 (Source: JLT Re)
Figure 2: Excess Capital Ratio and Global Property-Catastrophe ROL Index Change - 1999 to 2017 (Source: JLT Re)
Reinsurers therefore face the elevated losses of 2017 from a position of capital strength. According to JLT Re estimates, the market entered this year's hurricane season with upwards of USD 60 billion of excess capital. Any net reduction to sector capital is expected to be manageable due to continued capital generation by major traditional players and, perhaps more importantly, sustained capital inflows from alternative sources.
Mike REYNOLDS continues, "How capital market investors would respond to major losses has been a constant source of speculation. 2017 could prove to be a landmark year for the future of the ILS market. Despite concerns expressed by some over investors' long-term commitments to reinsurance, there are currently no signs of a mass exodus following these losses. Whilst a few providers may exit the market in the coming weeks and months and capital may be unable to roll over in certain instances, JLT Re continues to forecast strong alternative capacity growth over the next several years."
David FLANDRO concludes, "Events over the last couple of months are a stark reminder of how quickly things can change in the world of (re)insurance. This year's record breaking losses may impact reinsurance rates next year, particularly in loss affected regions. But perhaps more permanent features in the post-2017 environment will centre on risk perceptions and higher loss expectations for future years. Growing demand for additional reinsurance protection is already evident and JLT Re is committed to obtaining the best cover and structures available to clients in this new market environment."