Today, the (re)insurance sector operates in a rapidly changing and uncertain world. Elevated levels of VUCA – volatility, uncertainty, complexity and ambiguity – are unlikely to relent any time soon. In fact, the impending degree of change over the next decade looks set to transform the risk landscape like never before, according to Rob Bentley, CEO, Global Strategic Advisory, Guy Carpenter & Company.
In a report recently published by Guy Carpenter, we analyze how an accumulation of losses from recent extreme weather events, the specter of climate change and higher loss cost trends in a number of long-tail business lines are forcing carriers to reassess views of risk. Capital inflow levels and risk appetites are responding accordingly.
The (re)insurance sector has a long history of responding to periods of change and is well versed at navigating market-defining events such as Hurricane Andrew, the terrorist attacks of September 11, 2001 and Hurricane Katrina. Reinsurance has been a reliable and efficient source of contingent capital to insurance companies through these different market cycles, acting as an effective shock-absorber for the primary market.
The years 2017 and 2018 were no different – a series of sizeable events led to the most costly two-year period ever for insured catastrophe losses. After years of strong capital growth, the reinsurance market has been resilient to these losses and conditions remain largely favourable to cedents. But as recent developments have shown, events that challenge underwriting risk assumptions can still impact capacity deployment.
Reinsurers operating in the Florida market, for example, have reassessed their views of risk to reflect increased social inflation costs associated with Hurricane Irma. Due in large part to complex (and longer-tailed) loss drivers such as loss adjustment expenses and assignments of benefits (AOB), no other hurricane loss in recent history has developed adversely to the duration and extent of Irma (see Exhibit 1). In fact, loss creep from Irma has been one of the more significant “events” to impact the sector over the last year or so, with reinsurance carriers incurring the bulk of the incremental costs.
Exhibit 1: Claims Development For Costly North Atlantic Hurricanes
2000 TO 2017
Source: PCS, Guy Carpenter
Additional insured catastrophe losses in 2018 have added to loss burdens. These included Typhoon Jebi, the strongest typhoon to hit Japan in 25 years, and yet another prominent example of adverse development that has seen losses end-up significantly higher than initially expected. Most insurance and reinsurance carriers have been forced to increase loss provisions for Jebi by meaningful levels this year and, as a result, it has become one of the largest ”events” to hit the market so far in 2019.
Creep from Hurricane Michael has exacerbated the situation. Even though the storm only made landfall in the Florida Panhandle in October, and there was severe property damage in affected areas (potentially resulting in less scope for AOB claims), estimates from PCS at the time of writing show losses have developed adversely by approximately 45 percent from initial expectations.