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Rates seen rising despite loss uncertainty

There is a huge gap — tens of billions of dollars wide — between the third-quarter catastrophe loss estimates of reinsurers and those of risk modellers.

But whatever the true losses turn out to be, reinsurance prices are likely to rise significantly in the US during the January 1 renewal season.

That is the view of Taoufik Gharib, senior director, North America insurance ratings for Standard & Poor's Global Ratings, who will be speaking on a panel at a conference in Hamilton today.

Mr Gharib also said his discussions with insurers had led him to expect the losses from the California wildfires that devastated areas of wine country to be much higher than modellers have estimated.

In an interview, Mr Gharib said catastrophe modellers expected insured losses of about $100 billion from hurricanes Harvey, Irma and Maria, which between them caused widespread devastation in the Caribbean and the southern US.

The tally from re/insurers' preliminary estimates adds up to about $31 billion, he added.

“There's a possibility that the estimates of catastrophe modelling agencies will be revised downwards,” Mr Gharib said.

“The second possibility is that insurance and reinsurance companies may have underestimated their losses and we could see some adverse reserve development as a result.

“The other thing is that alternative capital, which is estimated at around $90 billion, by Aon Benfield is a big player in the retrocessional reinsurance market. Given the magnitude of the hurricane losses in recent weeks, even the retro market has been impacted.

“That market is still not as transparent as the traditional reinsurance market, but if you were to make an estimate of a 20 per cent impact on alternative capital, that would produce an $18 billion loss. If you add that to the $31 billion reported so far, then that would give you $49 billion.”

That still leaves a gap of more than $50 billion. Some of this could be explained by the way re/insurers report their losses, which is generally net of reinsurance or retrocessional coverage, and net of reinstatement premiums — the premium paid to re-establish the cover after there has been a loss.

Even if this is estimated at $10 billion or $12 billion, he said, there still remains a $40 billion-plus gap between estimates.

Wherever the truth lies, Mr Gharib said reinsurers should expect double-digit rate increases in the US. And because the US is the biggest insurance market in the world, he expected a “spillover” effect that would raise prices in other parts of the world too.

But much will depend on what happens between now and year-end with the loss estimates and clarification of how much reinsurance capital was wiped out.

Since the third-quarter losses, the California wildfires have added to the year's catastrophe claims, with insured losses in a range of $2 billion to $8 billion according to estimates from risk modellers AIR and RMS.

“Based on talking to players in the market, those losses could be even higher — we're talking $12 billion to $18 billion. And that could involve reinsurers, because many vineyards have been burnt. The crop can be lost for many years and that's covered in their interruption policies.”

Some alternative-capital vehicles have already started to raise capital in anticipation of improved rates and traditional reinsurers too.

And he felt that with the catastrophe losses being a capital event for the industry, many share buyback programmes would be suspended.

On the proposed US tax reform tabled by House Republicans last week, Mr Gharib said the segment that seeks to tax transactions between non-US companies and their US subsidiaries would have a meaningful impact on quota shares between the US and Bermuda,

“In the past the excise tax was just a small percentage and ultimately it could become 20 per cent,” Mr Gharib said. “If it were to happen that would increase the cost of doing business and cause Bermudian companies to revisit their quota shares.”

Bermuda still has the advantage of most other jurisdictions of having zero per cent tax on profits, he added.

Outside property-catastrophe insurance, Mr Gharib saw increasing activity in mortgage and cyber-risk markets among Bermudian groups.

He also expected the US National Flood Insurance Programme to purchase more private-sector reinsurance this year, after it suffered heavy losses from Harvey — estimated at between $7 billion and $10 billion. In January this year, the NFIP bought $1 billon worth of reinsurance and will benefit from its first claim on a private reinsurance contract as a result.

Mr Gharib will be moderating a CEO panel today at the Bermuda Reinsurance conference, presented by S&P and PwC at the Hamilton Princess

Expecting rate hikes: S&P analyst Taoufik Gharib

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Published November 07, 2017 at 8:00 am (Updated November 07, 2017 at 4:13 pm)

Rates seen rising despite loss uncertainty

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