Cat loss estimates to rise in 2018: Jefferies

A gap of $20 billion between company losses and estimates of total insured losses suggests that some company estimates will rise in 2018, fuelling reinsurance price rises, according to Jefferies analysts.

Aggregating the natural catastrophe losses reported at companies’ third quarter earnings for hurricanes Harvey, Irma and Maria (HIM) and Mexican earthquakes, Jefferies finds that pre-tax losses net of reinsurance/retrocession are currently at $46 billion. Estimating a $29 billion loss for the alternative capital market, numbers still fall short of the industry estimate of $90-$100 billion by just over $20 billion.

It appears that the industry midpoint estimate of $95 billion may have overestimated the losses. If true, then lower industry losses would challenge the prospect of a material rate rise at the 1st January renewals, the analysts noted.

However, Jefferies analysts believe the most likely explanation is that there will be upward revisions to the company loss reports (especially amongst smaller Lloyd's syndicates and US insurers), or even the industry loss estimates. Upward revisions have been fairly common after large loss events, primarily because initial catastrophe loss estimates contain a large proportion of subjectively calculated incurred but not reported (IBNR). After hurricane Katrina (2005) industry loss estimates rose 20 percent, while estimates rose 70 percent after Hurricane Sandy (2012).

Another reason to remain sceptical of reported losses include demand surge, where not all insurers factor in the inflation of rebuilding materials and labour costs post a catastrophe event, the analysts noted. In addition, loss estimates for hurricane Maria and specifically Puerto Rico's business interruption claims are likely to be particularly volatile given that much of the island is still without reliable power. Finally, reinsurers also tend to report losses net of reinstatement premium received meaning that actual losses are marginally higher.

Although Munich Re and Swiss Re incurred the largest nominal losses with more than $3.5 billion each, their losses proportionate to book value are materially lower than their Bermudian and Lloyd's of London peers, with SCOR a notable outperformer, the analysts noted. This trend is further exacerbated when taking into account the tax saving impact of losses, where European reinsurers appear to have particularly outperformed by saving 30 percent and more as a tax deduction, compared to many Bermudian reinsurers that saved less than 8 percent.

Jefferies analysts believe that the missing $20 billion gap between the declared losses will manifest over time through increased company level losses. Furthermore, the ‘Big 4’ European reinsurers are in strong position to take advantage of the rate rise in 2018 and still have strong balance sheets in spite of recent losses.

Take part in our reader survey to be in with a chance to win a £3,000 corporate subscription to Intelligent Insurer

More of today's news

Renewals negotiations point to 10% US cat rate increases

AIR Worldwide cuts hurricane Maria insured loss estimates

Neon appoints pricing head from Novae

AM Best raises concerns over $69bn Aetna acquisition

Markel CATCo promotes chief risk officer to CEO Bermuda

FM Global appoints SVP for underwriting and reinsurance

Don't miss our insurtech email newsletter - sign up today