Watching the clouds—but where’s the horizon?
It’s been a long time since the Monte Carlo Rendez-Vous coincided with a major nat cat event. As the industry travelled to the event a lot of wifi bandwidth was being used as everyone did their best to stay on top of the latest developments from Hurricane Irma, which was then coming ashore on the south-west coast of Florida.
Hurricane Irma came at a time when the market had been contemplating many of the same issues it has faced with for some years. Rating agency AM Best put it best when it said that the global reinsurance market in 2017 was like the French saying: ‘plus ça change, plus c’est la même chose’—usually translated as ‘the more things change, the more they stay the same’.
Speaking at the AM Best market briefing at Monte Carlo, Greg Carter, managing director of analytics at the rating agency, said that the industry in 2017 was dealing with the same issues he had identified at the 2016 event.
He produced a list that included the fact that US debt remains very high, interest rates are low, housing bubbles have formed in many areas (with subprime even reappearing in the US, albeit on a small-scale basis), terrorism appears to be rampant, there is still a great deal of uncertainty over the eventual shape of a Brexit deal and stock markets remain at all-time highs.
Looking at current global market trends, Greg Reisner, AM Best’s director of property casualty, said that some companies are better diversified than others at the moment, and so will be able to withstand losses from natural catastrophes more easily. He added that the re/insurance as a whole industry is well capitalised at the moment.
However AM Best pointed out that the 2016 composite combined ratio was now 101 percent and this was the first time in five years it’s been that high. The rating agency stated that due to the recent natural catastrophes (potentially including Hurricane Irma) the 2017 figure will be higher than that.
Changing of the guard?
Looking at the top 10 largest reinsurance groups Robert DeRose, AM Best’s vice president, reinsurance, noted that this year Munich Re has lost its number one position to Swiss Re, as the latter had benefited from a quota share deal with AIG. Looking at the list he added that PartnerRe has been expanding into life business.
However, DeRose stressed that there are some potentially tough times ahead for the industry. “Risk-adjusted returns are strained as pressure continues bearing down on underwriting margins and investment yields offer little help,” he said.
“The market headwinds at this point present significant longer-term challenges that industry players need to work through. AM Best has said that companies that are not proactive will not lead their own destiny. M&A will continue to be a part of the landscape over the next few years but M&A is not a cure and also has its own potential dangers.”
Carter noted that in terms of Brexit, there remains not a lot of information about what will happen, but that business is continuing as normal. He said that although the London Market has been worrying over losing its status as a reinsurance hub, so far no single centre in Europe has emerged as a rival. In addition he pointed out that London has a huge reinsurance infrastructure and that this would take time to dismantle. Brexit could therefore be a long-term problem.
AM Best stressed that it was too soon to gauge the full and final impact of Hurricane Irma. However, Reisner was able to comment on Hurricane Harvey.
“AM Best does not anticipate a significant number of rating actions for AM Best-rated entities to be associated with Hurricane Harvey. However, rated entities with significant market share in the region impacted will be evaluated relative to AM Best’s previous loss expectations and any material deviations potentially could lead to negative rating action in the form of under-reviews, outlook revisions or downgrades.”
AM Best also took the view that the global market will continue to become more efficient as all players strive to become closer to the client. Expenses are being squeezed and brokers are under long-term stress. As a result, the rating agency said, the role of brokers or even their size might change over the long term. DeRose pointed out that many of the usual lines are blurring as everyone tries to get closer to the client, and that as a consequence strategies are evolving to cope with this.
The rating agency did, however, also identify a number of potential opportunities for the market, which include cyber insurance, flood, mortgage, terrorism and insurtech.
Looking ahead, the rating agency stated that capitalisation remains strong for the market, but that performance has been deteriorating and pressures on margins continue to mount. As a result returns for some reinsurance companies will fall short on a risk-adjusted basis.
Stability in pricing
Hannover Re said that it expects to see stability in prices and conditions for the treaty renewals as at January 1, 2018. While improvements should be possible under loss-impacted programmes, covers that were spared losses will likely show a stable trend overall.
According to the company the renewals over the course of the year have demonstrated that reinsurers with expertise and a very good rating are able to benefit from the current state of the market.
Hannover Re said that it remains satisfied with the business renewed to date in 2017 and also anticipates extensive business opportunities for 2018. Along with the growing area of cyber risks and activities associated with the increasingly widespread drive towards digitisation, opportunities should open up, above all in US property and casualty business, where prices have firmed up.
In addition, the company expects sufficient potential for further growth in the area of motor covers in the UK, in credit and surety business and from covers taken out for capital management purposes following the implementation of risk-based solvency systems. Hannover Re expects natural catastrophe business to bottom out as a consequence of the active hurricane season.
Fitch Ratings, on the other hand, said that Hurricane Irma could possibly be a market-changing event, depending on its path and the level of damage it caused.
Brian Schneider, senior director at Fitch, said it was still early days in terms of assessing the impact of Irma, but stressed that it would in most likelihood be a wind event as opposed to a flood event such as Harvey.
He said that as things currently stood Irma might be a simpler event than Harvey, with the latter seeing losses complicated by the fact that it was more of a flooding event than a wind one.
Schneider pointed out that early estimates of the damage that Irma might cause ranged from $20 to $65 billion. He also said that quite a lot of the re/insurance for Florida is now covered by Florida specialists, who had been largely untested by any recent large event of this scale, and that all participants in the area would be assessing the situation carefully.
Looking at the bigger picture in terms of the global market at this point in 2017, Fitch also has a negative outlook. According to Fitch: “Intense market competition and the endurance of alternative capital have both contributed to our belief that a pricing floor has yet to be reached. Continued low investment yields, which Fitch expects to continue, put further strain on reinsurance profitability.
“If pricing or investment yields do not improve some reinsurers may be unable to generate positive operating results should catastrophe losses revert to the long-term historical average.”
Fitch stated that catastrophe losses for the first half of 2017 were below average, which would help the sector to absorb Harvey-related losses in the second half of the year. Fitch said that it believed that a large proportion of economic losses will be uninsured or covered by the US government’s National Flood Insurance Program, as losses were more likely to be flood-related than wind-related.
Moreover Fitch said that it believes that there could be further M&A activity across the global reinsurance sector in 2018, adding that some of these deals might involve foreign entities buying into Bermuda as they seek to diversify and develop business outside of their core markets and home regions.
Losses could trigger demand
Munich Re said that its projections for the reinsurance industry show little growth for the sector as excess capital continues to compete for business. However, the reinsurer also believes that the losses generated by the recent hurricanes will trigger more demand.
Total global property/casualty premiums ceded in 2016, including premium ceded by subsidiaries to the parent and therefore not available for external reinsurers, were at around €222 billion ($267 billion), according to Munich Re. Total reinsurance growth is estimated at 1 percent compound annual growth between 2017 and 2019; primary insurance is expected to grow by 2 percent during the period.
“Insurance and reinsurance is not a growth industry,” said Torsten Jeworrek, head of reinsurance at Munich Re.
In the past, reinsurance could generate better growth than the primary insurance sector but this is now set to change, Jeworrek noted.
“There are not many growth opportunities in our worldwide markets. This is basically why we see so much competition today,” he added.
The reinsurers noted that while traditional reinsurance capital remained fairly stable over the past few years at between $300 billion and $350 billion, alternative capital increased to $81 billion in 2016 from $71 billion in the previous year. In the first six months of 2017 it is estimated to have grown further to $89 billion, as investors continue looking for investment opportunities which are hard to find in the traditional capital markets, Jeworrek said.
Reinsurers therefore face few growth opportunities and excess capital remains available. Nevertheless, hurricanes Harvey and Irma are likely to boost demand for coverage and improve pricing in parts of the P&C sector in the upcoming renewal season.
“These events will trigger demand for back-up covers because the original cover might be exhausted,” Jeworrek said. “We will see an impact on prices particularly in nat cat, particularly in the US.”
He also claimed that the impact of the hurricanes may also affect the dynamics in the alternative capital industry, pointing out that it is the first stress test for their sustainability in the industry.
The reinsurer also discussed the protection gap and the fact that many natural catastrophe losses remain largely uninsured worldwide—even in highly developed markets. Although the exact level of losses from Harvey and Irma and the severe monsoon flooding in India are not yet detailed, it is already clear that there is a considerable gap between economic losses suffered and the amount covered by insurance, the company said.
Jeworrek said: “Governments and private industry need to work together to find solutions to reduce risk and strengthen the basis for prosperity in these countries.”
He added that while the demands placed on insurers are changing rapidly, their fundamental role remains the same: to secure value in order to promote prosperity and preserve livelihoods. In addition new technologies are giving rise to novel opportunities to do just that. Alongside loss indemnification itself, the importance of loss mitigation and avoidance is increasing.
As the end of the year looms before us, one thing is certain: the market is still tallying the damage from the recent natural catastrophes. A great deal remains unknown, including in which direction rates will trend. Will the recent hurricanes move the market, or will it take yet more events? A large number of companies and rating agencies have a negative outlook at the moment. All eyes will be on the renewal season to see if a more positive viewpoint starts to emerge.
