Life after HIM: what’s changed?

04 September 2018

After the most expensive loss year ever, 2017 was a watershed for catastrophes that some thought would change the market.

Tony Dowding

Last year was the largest insured catastrophe loss year on record after hurricanes Harvey, Irma and Maria (HIM) formed in quick succession to deliver devastating blows to coastal regions of the US and parts of the Caribbean.

Other significant events, including fierce wildfires in California and two powerful earthquakes in Mexico, added to loss burdens and pushed insured catastrophe losses above US$140 billion for the first time ever in real terms.

Such costly catastrophes in the past had brought about reduced reinsurance capacity and significant pricing increases, prompting predictions (by some) in the days and weeks after HIM made landfall, that double-digit property-catastrophe rate rises would likewise follow in 2018.

But as JLT Re pointed out back in October, such an outcome was always unlikely given the sector had been over-capitalised by tens of billions of dollars going into last year’s hurricane season.

David Flandro, Global Head of Analytics at JLT Re, says there were important differences in 2017 compared with previous large-loss years: “Reinsurance prices had fallen consistently in all regions during the previous five years, partly driven by below average insured catastrophe losses.

“The sector was flush with capital, investors had exhibited a healthy appetite for insurance-linked securities (ILS) and collateralised investment vehicles and reinsurance buyers systematically lowered cessions.”

Marginal impact from HIM

Flandro explains that after HIM, the issue of ‘trapped capital’ for ILS markets was used by some reinsurers to talk up rates in the lead up to 1 January renewal negotiations as they warned of reduced supply.

However, this did not materialise as virtually all alternative markets replenished lost or locked capital in time for the renewal. As a result, capacity levels were often found to be higher at 1 January 2018 than at the corresponding renewal in 2017.

The market has therefore not changed in the way some were predicting late last year. Pricing firmed a little in some areas but has generally been flat, and capital has remained relatively abundant.

In fact, dedicated reinsurance capital was only marginally affected by HIM, with roughly US$7 billion of new capital raised in the final four months of 2017.

With dedicated capital estimated to return to record levels during the first half of 2018, Flandro adds that “the means through which the sector raises capital at the margin have completely changed, with huge implications for property-catastrophe reinsurance pricing and underwriting in particular.”

This is backed up by renewal outcomes so far in 2018. JLT Re’s Global Risk-Adjusted Property-Catastrophe Reinsurance Rate-on-Line (ROL) Index rose 4.8 per cent on 1 January, considerably less than the 10, 20, even 30 per cent in previous large-loss years, and still below where the market was on 1 January 2016.

Increases were not universal, with outcomes depending on loss experience and region. At the April renewals, pricing was broadly flat, with small pockets of increases as well as some decreases.

Perhaps even more tellingly, only negligible rate increases were recorded for Florida property-catastrophe renewals at 1 June.

On this occasion, JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index increased by only 1.2 per cent, failing to match the rate increases recorded for US property-catastrophe business at 1 January 2018 despite a greater number of loss-affected programmes renewing after Hurricane Irma’s landfall in Florida last year.

Brian O’Neill, Executive Vice President, JLT Re (North America), says: “Renewal experiences in Florida were wide-ranging, with some cedents’ loss-affected layers seeing risk-adjusted rate increases in the mid-to-high single-digit range.

“Cedents who had demonstrated strong post-event capabilities clearly benefited from the additional capacity in the market. Rate increases for loss-impacted layers were muted while, in some cases, loss-free layers were even down modestly.

“Overall, the renewal was highly competitive, reflecting abundant capacity and only moderate increases in demand, despite the market suffering its most expensive catastrophe loss year on record in 2017.”

Overall market changes

So what has changed after HIM? Certainly there has been a (positive) short-term impact on the market in terms of earnings, but capital was replenished rapidly and pricing saw very moderate increases, which may not be sustainable.

Taking a broader view, the market is changing, but not because of HIM. The market is adapting to new sources of capital and new entrants.

This, in turn, has led to a period of consolidation in the sector, with a steady stream of reinsurer M&A. Indeed, there have been several large deals announced recently and there are probably more to come, even if the target pool is reducing, given there are fewer independent, quoted reinsurers left in the ring.

“We have been saying for nearly a decade that continuity risk, not credit risk or market security, deserves to be at the forefront of cedents’ minds,” says Flandro, “and I hope this will have proven to be good advice.

“That said, reinsurer M&A has not generally been bad for cedents, especially where it has brought stronger, larger balance sheets, increased reinsurer capabilities and, until very recently, consistently and markedly lower prices.

“I don’t believe M&A has yet significantly lowered the level of cedent choice. Most of the same reinsurers that were once independent still exist as trading entities within larger groups, and competition seems fiercer than ever.”

Private equity, industrial companies, asset managers and others have surfaced as buyers in recent years and this looks set to continue, according to Flandro.

“There is a deep and diversified pool of capital which is interested in the reinsurance sector.

“One could argue that the main role played by alternative capital has not been as a buyer of reinsurance companies but as a new source of reinsurance capital, which has kept pricing and returns lower, thereby increasing the likelihood that reinsurers will engage in M&A,” he explains.

A major change in the market is that risk penetration is expanding into new areas (such as cyber) while technological advancements and InsurTechs present a window of opportunity for (re)insurers to reinvent the way products are created, priced and distributed.

But perhaps, most significantly, the regional concentration of risk is changing in the reinsurance sector, with the Asia Pacific reinsurance market on track to soon become larger than both the North American market and the EMEA market.

In other words, the power of the US property-cat market to shape the global reinsurance dynamic seems to be waning.


Please contact David Flandro on +44 (0)20 7466 1311 or



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