After five years of below-average loss experiences, 2017 looks set to become the most expensive catastrophe loss year ever for the P&C sector. The vast majority of these losses are down to the hyperactive 2017 hurricane season which has, to date, dealt a devastating triple blow to residents and businesses in the United States and Caribbean in the form of hurricanes Harvey, Irma and Maria (HIM).
Prior to this year’s hurricane season, no major hurricane had made landfall in the United States since Wilma in 2005. That extraordinary run of good fortune ended abruptly when Harvey and Irma caused widespread devastation after coming ashore in Texas and Florida, respectively, as category 4 storms. Extreme and prolonged rainfall accompanied Harvey’s landfall whilst Irma was more of a conventional wind and surge event as it moved up Florida’s west coast. Maria followed soon after, cutting a destructive path through parts of the Caribbean (Puerto Rico in particular) to produce one of the market’s most expensive natural catastrophes ever outside the US mainland.
The events of 2017 therefore look set to rank alongside other market-defining catastrophes. But following several years of low loss activity and sustained capital inflows, the reinsurance market faces this new market environment from a position of strength. Indeed, sector capital was at record levels heading into the 2017 hurricane season, which translated into at least USD 60 billion of excess capital. And losses so far this year have fallen within modelled expectations – the sector is well prepared for three landfalling hurricanes in the world’s most comprehensively analysed peak risk region.
This report assesses how the events of 2017 are likely to impact the reinsurance market and provides historical context to highlight key differences that exist today with previous market-changing events. As things stand,
JLT Re believes that the nature of the losses in 2017, and the sector’s existing capital buffer, will prevent a repeat of the market reaction that followed the 9/11 attacks in 2001 and Hurricane Katrina in 2005. There was an element of the unexpected with both of these events and it must be remembered that the sector’s capital position was lower and less resilient during these years as it respectively entered and exited the liability crisis.
This is not to say consequences will not be felt. Harvey, Irma and Maria alone are expected to cost carriers up to USD 100 billion. Reinsurers and insurance-linked securities (ILS) investors are on the hook for a substantial portion of this total due to Florida being a heavily reinsured market and several insurers in the Caribbean having modest retentions. Retrocessionaires are likely to suffer particularly significant losses, given several reinsurers have taken advantage of competitive market conditions to obtain broader or additional protection in recent years.
All this has reset expectations heading into the 1 January renewal. For the first time since 2012, upward pricing pressures are likely to build in property-catastrophe lines, particularly in loss-affected regions. But given that average global property-catastrophe rates have fallen by approximately 33% during this time, any increase is only likely to offset this reduction partially. In addition, the length of any market hardening could be mitigated by additional new capital flowing into the sector seeking yield post-event.
Perhaps a more permanent feature 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.
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