Hurricane Irma to boost US nat cat reinsurance rates by up to 5%

Hurricane Irma, which hit Florida over the past weekend and is expected to result in $16-26 billion of reinsured losses, will trigger rate increases of 4-5 percent for US nat cat reinsurance cover, according to Sept. 14 research by asset manager AllianceBernstein.

The main trigger for rate hikes is the likely reduction in alternative and conventional reinsurance capital, according to the analysts. The earnings impact of Irma and Harvey seems well within the modelled range and in itself would not justify a material rate increase as this is what primary insurers and their customers have paid for. But about 8-10 percent ILS capital will be eroded and further ILS capital will be trapped until loss estimates are robust, suggesting ILS capital supply will be lower at least for Jan 1 renewals. In addition, Lloyd's is seen potentially over-exposed in Florida, which could lead to lower supply form this side as well.

Of the total losses for reinsurance, about $12-17 billion will be borne by traditional reinsurers with the balance of $4-9 billion paid by ILS capital, according to the report.

Based on AllianceBernstein estimates for Harvey and Irma, this would wipe out most if not all of 2017 profits within P&C reinsurance. But different from 2005, the last time natural catastrophes led to market-wide inflection in rates, the reinsurance sector is flush with excess capital, estimate at about $200 billion excess. Reinsurers have over-earned the last 4-5 years due to very benign claims experience and 2017 is not a massive outlier with 13 percent above average losses, according to the report. In addition, there is idle conventional and ILS capital just waiting for rates to go up. The analysts therefore conclude that rate changes will be restricted to US nat cat, while other rates stay fairly flat.

Nevertheless, the hurricanes will be a first test case for the sustainability of the $89 billion of ILS capital in the reinsurance market. While some ILS investors seem to be ready to step up their allocation should rates rise, the analysts see investors in ILS funds suffering from material erosion of principal or having their principal trapped until losses become clear partially walking away. The worst case for ILS would be if investors contest claims falling in the "grey zone" of coverage while professional reinsurers are more willing or quicker to settle.

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