Industry experts agree that the recent U.S. hurricanes are more likely to be earnings events than capital events, but have the potential to change risk perceptions and management behavior.
William Hawkins, analyst at Keefe Bruyette & Woods, said he expects that Hurricane Harvey will be enough to exhaust the catastrophe budgets of many of the biggest reinsurers in the second half of the year, but it will be no worse than that. "It will be on the edge of being an earnings event, but nothing more," he said. Stressing that the level of uncertainty around losses for both events remained very high, Mr. Hawkins said that, depending on its path, Hurricane Irma had the potential to become a more meaningful earnings event for the sector. He suggested that while this would affect the pricing of renewals, we should not exaggerate how big the impact might be on global pricing. It would take a serious capital event to trigger a "hard" market (in which prices would rise).
David Flandro, head of global analytics, JLT Re, agreed that the storms are more likely to be earnings events than capital events for the industry. Thomas Lillelund, CEO, Aspen Re, said he expected that losses from Harvey and Irma will affect pricing--certainly in the U.S. and maybe elsewhere. "There remains great uncertainty, but I would expect a reaction from the industry," he said. Mr Flandro reiterated that he expected the losses to shore up the softening market--"soften the softening"--after prices dipped more than anticipated for June renewals, according to the company's risk adjusted rate online index.
Mr. Flandro also noted that these storms will make the industry reevaluate its ability to model such events, such was the unusual path Hurricane Harvey took. "Things like that are very hard to model; there was a level of unpredictability about it. These events will remind people that randomness is out there in the market. Even for the long periods when no hurricane made landfall there was a level of randomness.
"I agree that the industry has the capital to cope with these losses, but they could have the effect of changing perceptions of risk premiums and the behavior of management. Some companies will not have such a great year, and at a minimum these losses should shore up softening for 1/1 renewals, but much depends on the next 24 hours."
This Is What We Are Here To Do
Mike Krefta, CEO, Hiscox Re, said it was pointless to speculate on the levels of losses from the hurricanes at this stage, but he added that industry players should not forget they are here to manage uncertainty and to help clients in their time of need. "This is what we are here to do. We need to ensure we find ways to proactively help the market after the event and help clients manage uncertainty going forward."
Mr. Krefta said there are opportunities around things such as the protection gap, human capital and technology. These represent tremendous opportunity for the market. "It is always difficult when horrendous things are going on with natural catastrophes, but the opportunities to close the protection gap are very real," he said. "We can help people in the process, by ensuring they have flood insurance or cyber coverage. There are tremendous opportunities and we should be tackling these."