Will natural catastrophe losses lead to reinsurance ratings jump?

Fitch Ratings expert gives his views on market pressures after big losses

Will natural catastrophe losses lead to reinsurance ratings jump?

Insurance News

By Bethan Moorcraft

Global reinsurance rates are “still extremely pressured” despite a year of significant natural catastrophe losses in 2017, according to Fitch Ratings director, Graham Coutts.

Loss calculations being reported by industry bodies are variable but considerable. Last week, Impact Forecasting’s Weather, Climate & Catastrophe Insight: 2017 Annual Report revealed there were 330 natural catastrophe events in 2017 that generated economic losses of US$353 billion.

The Aon company attributed a huge 97% (US$344 billion) of economic losses to weather-related events, including Hurricanes Harvey, Irma and Maria in the US and Caribbean, plus Typhoon Hato in China and Cyclone Debbie in Australia. It also said insured losses were among the costliest ever incurred, reaching US$134 billion in 2017 – just behind the record US$137 billion in 2011.

Normally, after such large catastrophe losses, it would be fair to expect the reinsurance market to react by increasing rates. But Fitch Ratings does not expect a significant pricing spike in 2018, due to three key reasons outlined by Coutts.

“The catastrophe losses were fairly well spread between the insurance, the reinsurance and the alternative capital industries,” he said. “Maybe only about 30% of the overall losses fell on the reinsurance industry, [which is also] maybe less than if there had been a single, very large loss event.

“Secondly, the reinsurers themselves have proven to be very resilient. There has been a limited impact on capital and we haven’t really seen any distressed companies. Any ability they might have had to [enforce] significant rate increases have probably been marginalised to some extent.”

The final and “most important” factor in global reinsurance stability is the role of alternative capital, Coutts explained. There are two key elements to this around how reinsurers are using alternative capital, and how this supporting market is also acting as a competitor and putting pressure on rates.

“Reinsurers are making better use of alternative capital. In terms of retrocession, what they’re doing is taking a lot of the risk off their own balance sheets and transferring that to the alternative capital market,” he told the audience at the Fitch Ratings Insurance Roadshow 2018. “So, when there is a big loss, it’s a bit more spread and not directly impacting the reinsurance industry as it might have done in the past.

“On the other hand, you also have the impact of this alternative capital acting as a competitor. They are competing with traditional reinsurers and they can offer quite cheap alternative forms of reinsurance, which puts pressure on the overall industry to [regulate] rates.”

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