Waiting for a $250bn industry loss

A $250 billion industry loss may be needed to turn the market after a combination of hurricanes, earthquakes and wildfires costing the insurance industry over $140 billion in 2017 resulted in only moderate rate increases, according to broker JLT.

David Flandro, global head of analytics at JLT Re believes that an unexpected or exceptionally large loss is now required to turn the market. “A $250 billion industry loss is not beyond the realm of possibility, while several years of record losses would alter market dynamics,” he said in a market report.

The 2017 losses created the highest inflation-adjusted global insured loss on record, JLT noted. However, the much-anticipated market correction failed to materialise and the modest rate increases seen in January have since diminished during subsequent renewals, the report says.

Global insurance and reinsurance markets were shaken by last year’s record-breaking catastrophe losses, but capital has been quick to flow back into the market, extinguishing insurers’ hopes of widespread price increases in 2018, the report explains.

“Dedicated reinsurance sector capital remains strong, despite record catastrophe losses in 2017, and alternative capital has shown itself to be committed to insurance risk,” Flandro explained.

“It’s now obvious that the means through which the sector raises capital at the margin have completely changed over the past decade, with huge implications for property-catastrophe reinsurance pricing and underwriting in particular,” Flandro said.

The Florida property-catastrophe renewal on June 1, which coincides with the start of the annual US hurricane season, resulted in only negligible increases, the report notes. Pricing for Florida property-catastrophe business increased just 1.2 percent at the June renewal and remains 40 percent down on 2012 levels.

After experiencing significant losses in 2017, alternative capital providers raised some $7 billion of new capital in the final four months of 2017, while capital has increased by a further $10 billion due to earnings and unrealised gains, in addition to investment during the first half of 2018.

JLT Re estimates that dedicated reinsurance capital is back at record levels, in large part due to the increase in alternative capital, which now accounts for 23 percent of dedicated reinsurance capital compared with just 7 percent in 2005.

As a result, dedicated reinsurance capital has increased at a faster rate than premiums, putting rates under additional pressure, the report notes.

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