After enduring one of the more active hurricane seasons in recent memory, U.S. P/C insurers are well positioned for what is pointing to an average hurricane season in 2018, according to Fitch Ratings in its annual hurricane season preview report. Early forecasts of the upcoming June 1 to November 30 hurricane season suggest that environmental forces that serve to encourage the development of tropical storm activity appear to be relatively neutral and portend a near-average season.
Hurricanes Harvey, Irma and Maria led to some $80 billion in insured losses last year. Primary U.S. insurers incurred significant losses from these events. However, the nature of 2017’s storms led to a sizeable portion of the financial fallout to be shouldered by offshore reinsurers, alternative capital and the National Flood Insurance Program (NFIP).
“Significant property losses in 2017 will lead to higher premium rates in loss-affected primary market segments,” said Christopher Grimes, director at Fitch Ratings. “Market pricing data indicates that the soft market appears to have finally reached a bottom with rate increases seen in most lines, particularly commercial property and property catastrophe reinsurance business.”
A market that bottomed out last year, reinsurers are seeing rate increases again, though not to the degree that many market participants had anticipated. Further, the improved pricing environment may be short-lived for reinsurers. “The reality of the reinsurance market is that alternative capital competes directly with traditional capital, which limits the extent of cyclical price changes following severe catastrophe-loss years,” said Senior Director Brian Schneider.
In Florida, insurers avoided a direct landfall in Miami by Irma, which would have been a much costlier event for the industry. The Florida primary insurance market also reported net insured losses from the 2017 season that were relatively limited compared with sizable gross losses that companies largely passed to the reinsurance sector and alternative capital investors. Florida specialist homeowners’ insurers rely heavily on the use of robust reinsurance programs to manage capital and stabilize financial performance. “Irma provided a meaningful test of insurers’ reinsurance programs, demonstrating the value of strong risk management capabilities,” said Grimes.
Demand for insurance linked securities and catastrophe (CAT) bonds remains very strong to date in 2018 with nearly $3.6 billion of CAT bonds exposed to named storms announced thus far. Capital markets returned in full force following losses paid with few visible trapped capital effects from outstanding 2017 claims settlements, which according to Grimes is a sign that “investors remain undeterred from allocating capital to the sectors as investors continue to view catastrophe (re)insurance as diversifying source of risk.”
As the season commences, U.S. insurers are well prepared to withstand a future significant catastrophe event in 2018. Aggregate industry policyholders’ surplus grew by 7.5 percent in 2017 to a record $765 billion, as elevated underwriting losses were offset by higher total investment returns.
“U.S. Hurricane Season 2018: A Desk Reference for Insurance Investors,” provides analysis on potential effects of a major storm season on large insurance companies based on direct premium property insurance market share by state, and the industry as a whole. The report is available at ‘www.fitchratings.com’ or by clicking on the link.
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