Recent natural disasters have reinsurers rethinking return targets, business model.Thanks to a quick succession of three major hurricanes and a series of devastating earthquakes over the summer, reinsurers now confront their greatest losses in a decade. Munich Re recently estimated that insured losses from Hurricanes Harvey, Irma, and Maria reach $100 billion, a total that far surpasses the $75 billion reinsurers covered from 2005’s Hurricane Katrina.
After considering insured losses from Hurricanes Irma and Maria, risk modeling firm AIR Worldwide calculated a higher sum of $135 billion — a figure that doesn’t account for damages caused by earthquakes in Mexico. Swiss Re’s Chief Economist Kurt Karl added the combined losses from the three hurricanes and the earthquakes to reach an estimate of $95 billion, according to the Financial Times.
Losses of that magnitude have already started to impact quarterly financial results from individual reinsurers. Munich Re reported a third-quarter loss of $3.13 billion, which will produce a quarterly net loss of $1.65 billion. The German company also warned that its profits for the year will be “small.”
Rates to Rise
In response to these losses, reinsurance executives expect rates to rise in 2018. At last month’s Property Casualty Insurers of America Association’s 2017 meeting in Chicago, Brian Quinn, CEO of North America for Odyssey Re Holdings Corp., noted that the industry lost $100 billion in the last quarter alone. “It’s hard to see how an industry with that sort of reduction in capital over such a brief period in time could lead to anything other than a meaningful change in rate,” he added.
According to Reuters, Hannover Re is mulling increasing rates in North America by as much as 50%. Reinsurance experts, however, are split over how widespread those increases will be. Speaking at the Chicago conference, Aon Benfield’s CEO Eric Andersen said that rate changes will be made on a case-by-case basis. “I don’t really buy into the market is going to be up 10% around the world or the market is flat,” he said. “Ultimately, the market is made up of individual customers, and each portfolio is different.”
Swiss Re’s Karl disagreed with that assessment. “Pricing has been very challenging for the past two years, and when prices are very low going into a large natural catastrophe year you are likely to see a more general price increase,” he said.
Karl added that rising rates will affect the primary insurance sector as well as the reinsurance market. His claim is supported by reports that Travelers Cos. Inc. and Hartford Financial Services Group Inc. are considering raising rates following significant losses in the last quarter.
A New Outlook
In addition to increasing rates, several reinsurers indicated that they intend to use recent catastrophic losses to review their return targets and business models. At the Chicago conference, James Kent, Global Deputy CEO and North America President of Willis Re, questioned whether reinsurers were receiving “adequate returns” after the spate of natural disasters.
Steve Levy, President of Reinsurance with Munich Reinsurance America Inc., further speculated whether reinsurers had sufficient capital to withstand a sudden spike in insured losses. “If we can’t achieve as an industry a cost of capital return after a year which is likely to see the worst catastrophe losses in history, then there’s a real fundamental issue,” he said.
In an interview with Business Insurance, Monica Ningen, Swiss Re’s Managing Director and Chief Property Underwriter, said that the immense losses could spur reinsurers “to take a look at their balance sheets and consider what they’re writing, how they’re writing it, what reinsurance they’re buying and whether it’s fit for their long-term strategy.” She added that companies will also revisit their deductibles and policy structures in the wake of the hurricanes and earthquakes.
“2017 has proven that the big event is very possible,” Ningen said, “but is the industry ready to tackle it head on?”