Lloyd’s and Bermuda reinsurers at risk from nat cat losses

The extent to which rates may or may not increase in the aftermath of severe losses remains the biggest debate in the industry. Arno Junke, the CEO of Deutsche Rück, tells Baden-Baden Today that there will be a wide range of implications in the market.

As the nat cat losses in the third quarter turn into a capital event for some reinsurers, Lloyd’s syndicates and Bermuda players are most likely to face some stress, while the retrocession market will be the first to react, according to Arno Junke, the CEO of Deutsche Rück.

Losses from catastrophe events in the third quarter will likely wipe out global reinsurers’ annual earnings and ultimately become a capital event for the sector, according to S&P Global Ratings. The agency expects nat cat losses in the third quarter from events such as hurricanes Irma, Harvey and Maria to reach more than $100 billion in insured catastrophe losses.

While the hurricane season is likely to turn into a capital event for some players, Junke believes that this is more likely to happen to companies within Lloyd’s or in Bermuda.

“Some companies might disappear, and there are likely to be more mergers, and some portfolios will be moved into run-off,” he says.

Lloyd’s had previously said that it expects losses from hurricanes Harvey and Irma combined to be in the region of $4.5 billion, net of reinsurance.

Moody’s expects Lloyd’s to record a pre-tax loss in 2017 due to the hurricanes that struck North America in the third quarter.

As the nat cat losses turn into a capital event for some re/insurers, retrocession will be the first area to react, Junke says.

“Impacted retrocession programmes will certainly face rate changes. Unaffected programmes will want to make sure that prices won’t change or that increases will at least be moderate.

“I think we can rule out further price reduction,” he says.

In the traditional retrocession market, portfolios being moved into retrocessions will be inspected more carefully from a technical perspective after the third quarter nat cat events, Junke explains.

“Here we are more likely to see price reactions than in insurance-linked securities (ILS) markets.”

For programmes facing price increases there is theoretically the option to turn to the alternative retrocession market such as ILS, Junke notes.

This does, however, entail additional transaction costs and there may be some time pressure. But usually, retrocession buyers keep an alternative plan ready to go live, he says.

Market participants are watching closely how the capital markets are going to react to the nat cat losses, which may represent the first big test for the comparatively young alternative reinsurance market.

There are two components to it which have not changed, Junke says. One is the low interest rate environment, the other is enough capital supply. But there will be some losses in the non-traditional reinsurance market, which is likely to make investors more cautious, he adds.

Overall, there will be enough capital waiting for an opportunity to be deployed into the reinsurance sector, where yields remain attractive compared to other investments. It also continues to be an important diversification tool for investors, Junke says.

Deutsche Rück expects its own retrocession portfolio to remain attractive for underwriters. It buys significant amounts of retrocession on behalf of German public insurers. In 2016, it retroceded €456 million ($546 million) in premiums. It buys retro cover for nat cat and fire and uses a panel of reinsurers to diversify the exposure of its owners.

The reinsurer’s portfolio structure includes 61 percent property and 21 percent liability, accident, motor as of 2016 end. Gross premiums written were €1.18 billion ($1.4 billion) in 2016.

“I expect windstorm and floods in Europe to remain an attractive form of risk diversification against, for example, hurricanes or earthquakes in North America,” Junke says.

“It is possible that some retrocession partners may have come under pressure due to recent events. But overall, I think the European cat business is an attractive diversification opportunity for global retrocession underwriters,” he concludes.

Arno Junke is chief executive officer of Deutsche Rück. He can be contacted at: arno.junke@deutscherueck.de

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