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Recent Natural Disasters Are Alarming Reinsurance Providers

by Precise Leads

November 14, 2017

Massive losses from natural disasters will dent yearly earnings for global reinsurers, but strong capital reserves will keep providers solvent.

In the aftermath of three devastating Atlantic hurricanes and two major earthquakes in Mexico, several global reinsurers anticipate weakened earnings in 2017. Germany’s Hannover Re and Munich Re, for example, both warned of profit downturns, citing the astronomical costs of Hurricanes Harvey, Irma, and Maria as well as the earthquakes in Mexico.

Hannover Re stated that it expects the recent natural disasters will prevent it from meeting its net profit target of €1 billion (or $1.17 billion) for this year. Hannover Re’s parent company, insurer Talanx, further cast doubt on it ability to reach its profit goal of €850 million (or $997 million) because of the “development of the large loss burden” for this year.

Other major reinsurers such as Swiss Re and France’s SCOR continue to assess the financial fallout from the recent spate of natural catastrophes, according to a Reuters report. “It will take weeks before we have a sense of where we are,” Swiss Re CEO Christian Mumenthaler said.

In a statement, SCOR said that the damages inflicted by Hurricanes Harvey and Irma will alter third-quarter earnings rather than capital reserves. It was still reviewing the effect of Hurricane Maria, but anticipated no change from that initial projection.

Downgrades Possible as Losses Mount

While reinsurers calculate their individual losses, the insurance industry as a whole stands to absorb massive payouts from 2017’s string of powerful natural disasters. Fitch Ratings estimates that insurers and reinsurers could be hit with $100 billion in catastrophic losses following the hurricanes and the earthquakes in Mexico.

In addition to weaker earnings, Fitch predicts that the magnitude of losses may diminish some insurers’ and reinsurers’ capital reserves, though it doesn’t anticipate insolvency for any because of the industry’s strong capital reserves. According to Fitch, the U. S. property and casualty industry boasts total statutory capital of more than $700 billion, while the global reinsurance market holds $600 billion in capital reserves.

In its recent analysis, Morgan Stanley estimates that total insured losses from the hurricanes and the earthquake could be as high as $165 billion. Like Fitch, Morgan Stanley emphasizes the U. S. P&C industry is well capitalized with total reserves of $700 billion, but unlike Fitch, it estimates that global reinsurers have only $300 billion in capital reserves.

Morgan Stanley asserts that those robust capital reserves will enable the industry to withstand a third-quarter loss of $100 billion. However, the firm warns that insurers and reinsurers will nevertheless see lower profits and decreased excess capital lines. Ratings agency A.M. Best Co. Inc added that losses from Hurricane Maria will be distributed evenly among global reinsurers.

Meanwhile, the catastrophe bond market, which raises debt for insurance enterprises following natural disasters, will also be affected by recent major loss episodes. Bermuda-based Markel CATCo Investment Management told its investors to expect a drop off in annual returns for 2017.

Better Modeling

Reinsurers play a vital role in the insurance ecosystem by backing insurance companies with reinsurance funds. By sharing financial risk with insurers, reinsurers enable insurance companies to sustain payouts for massive losses, keeping them afloat when disasters strike and able to write policies for lesser risks.

Like insurers, reinsurers have had to cope with dwindling returns in an increasingly competitive marketplace. In an attempt to boost profits, some large reinsurers have turned to smaller, more customized and localized deals.

In the face of the significant losses caused by this year’s catastrophic incidents, reinsurers will likely undertake new strategies to strengthen their balance sheets. Antonello Aquino, Associate Managing Director at Moody’s, told Reuters that the unpredictability of current storms may force risk modelers to re-evaluate their previous assumptions. For its part, Swiss Re works with communities to take proactive measures to lessen damage from weather-related catastrophes.

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