Irma to trigger US nat cat rates increases of 4-5%

Hurricane Irma is expected to trigger rate increases of 405 percent for Nat cat reinsurance cover, largely driven by a likely reduction in alternative and convention reinsurance capital, according to research from asset manager AllianceBernstein.

Irma hit Florida over the past weekend and is expected to result in $16-26 billion of reinsurance losses.

The report suggest both Irma and Harvey’s impact on earnings are well within the modelled range and would not justify a material rate increase.

However, around 8 to 10 percent ILS capital will be eroded and further capital will be trapped until loss estimates are robust, suggesting ILS capital supply will be lower at least for Jan 1 renewals.

Around $12-17 billion of the total reinsurance loss will be paid by traditional reinsurers and $4-9 billion by ILS capital, the report stated.

Estimates suggest Harvey and Irma would wipe out most if not all 2017 P&C reinsurance profits.

AllianceBernstein analysts suggest rates changes will be restricted to US nat cat, while other rates will stay fairly flat.

Compared with the last time nat cat led to market-wide inflection of rates in 2005, the reinsurance sector has a lot of excess capital, estimated at around $200 billion. The report also noted that reinsurance have over-earned in the last four to five years due to a very benign claims experience, and that 2017 is not a massive outlier with 13 percent above average losses. There is also idle conventional and ILS capital waiting for rates to go up.

The analysts believe these hurricanes will be a first test case for the sustainability of $89 billion of ILS capital in the reinsurance market.