Hurricane Dorian was edging slowly up the east coast of the USA after devastating the Bahamas - causing multiple deaths and at least $3bn worth of damage - while the world's reinsurance community gathered once again in the balmy sunshine of Monte Carlo for Les Rendez-Vous de Septembre over the weekend.
The year to date has been kind to reinsurers with prices rising with few big Nat CAT payouts so far. But that could change in the blink of an eye if Dorian decides to make landfall – an increasingly remote prospect. Both 2017 and 2018 were cruel years for reinsurers because of a stream of Nat CAT but weather-friendly 2019 has seen the world’s reinsurers ask for – and get - higher prices on contract renewal and more price hardening is forecast on the back of ‘loss creep’ – where original estimates of catastrophe costs prove to be far below reality.
But reinsurers in Monte Carlo will also be keeping a weather-eye on the continued influx of competitive alternative capital – with yield-hungry investors piling in on the lookout for margin in an otherwise bleak low-interest-rate environment.
Three drivers of the market
At a media briefing in Monte Carlo yesterday Fitch Ratings senior director, insurance ratings Graham Coutts pointed to CAT losses, pricing and ILS as being the three main drivers of the $600bn reinsurance market. “The pricing outlook is improving,” he said. “But not enough to affect the ratings outlook for the sector.”
“Hurricane Dorian isn’t going to be a very large event,” said Mr Coutts and predicted that final losses would come in under $10bn. Perhaps more significantly, however, Mr Coutts said, “Pricing is much more local and what happens in one market may not affect other markets.” The other significant prediction was that, “We may see further ILS capital retreat from the market in the face of continued loss-creep.”
Data from Willis Towers Watson indicates that there has been a huge fall off in CAT bond issuance in the first half of 2019 – down to $2.7bn from $7bn for the corresponding period the year before. “We think a further firming of rates is likely,” Mr Coutts said.
The reinsurers’ annual shindig saw a kickstart on Saturday when Swiss Re released its latest sigma report that showed that the global economy is less resilient and has less capacity to absorb shocks than it did in at the onset of the global financial crisis in 2007.
The good news for the Asia Pacific region is that it has seen insurance resilience improve in both the advanced and emerging economies of the region since 2007 – whereas the euro area has seen resilience decrease the most since 2007.
"It is a trillion-dollar opportunity for the insurance industry," said Swiss Re group chief economist Jerome Jean Haegeli. "The insurance industry has largely kept pace with growing loss potentials and can do more to improve resilience. Emerging markets, in particular, benefit more strongly from insurance protection than mature economies, which often have greater access to alternative sources of funding."