- The recent series of catastrophic events – earthquakes in Mexico, Hurricanes Harvey, Irma and Maria – is reminding cedents that reinsurance is one of the most effective ways to protect corporate capital bases
- Harvey on its own is likely an earnings event that will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquakes in Mexico and Hurricanes Irma and Maria, however, could create a capital event
- The earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of the 144A product. We expect that these instruments will demonstrate their effectiveness and serve their intended purpose
While the reinsurance product has delivered compelling balance sheet solutions since its beginnings, recent catastrophic events in Mexico, the Caribbean and the United States have created a perfect opportunity for the market to showcase its ability to adapt solutions to the unique risk profiles of individual clients seeking to manage capital events, according to David Priebe, Vice Chairman, Guy Carpenter.
“The value of reinsurance as a capital substitute was very apparent during the 2008 financial crisis. The reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the recent series of catastrophic events – earthquakes in Mexico, Hurricanes Harvey, Irma and Maria – is reminding cedents that reinsurance is also one of the most effective ways to protect corporate capital bases from these events,” says Priebe.
The recent loss events have the potential to make the third quarter of 2017 one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, some analysts expect insured losses of at least USD 100 billion. According to A.M. Best, total catastrophe losses of USD 75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers. Although there appears to be little risk to solvency, individual insurers’ earnings will be impacted and in some cases excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.
“The U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another USD 435 billion, so the sector is well positioned to absorb such losses,” he adds. “But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up capital during the recent favorable years, while capital-market investors seeking non-correlated investments have put record amounts of money into catastrophe coverages.”
“Harvey on its own is likely an earnings event that will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquakes in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity – and, of course, depending on the final numbers – the aggregate impact may be a one-time firming of rates, halting decreases that recently began to moderate as reinsurers approached technical pricing floors.”
“Insurance-linked securities (ILS), which provide USD 80 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity,” he explains. “The earthquake and hurricanes also provide an opportunity to define the viability and effectiveness of the 144A product. We expect that these instruments will demonstrate their effectiveness and serve their intended purpose.”
Priebe expects the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. “Industry capital is at an all-time high and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation.”
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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.