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Bernstein analysts expect US nat cat prices to increase by an average of 10 percent and US commercial property to go up by on average 5 percent as a result of insured losses caused by Hurricane Irma, Harvey and Maria.
The three major hurricanes in the third quarter are expected to result in about $75 billion of insured losses at the mid-point, according to an Oct. 4 Bernstein analyst note.
Adding the $24.5 billion of nat cat losses until August and the two Mexican earthquakes results in a total nat cat bill for the global insurance sector of just above $100 billion, $50 billion above the 10-year average, the analysts noted.
Roughly, 40 percent of these abnormal losses will be borne by primary insurers, 50 percent by reinsurers and the residual 10 percent by “alternative capital”, according to the note.
The expected price increases following the losses should allow the sector to earn back about half of the extraordinary nat cat losses seen in 2017, the analysts continued. However, they noted that the market is unlikely to see a similarly strong price effect as in 2005, when severe loss events caused a market-wide rate hardening. For one, a much higher excess capital has not been eroded. Also, opportunistic capital is waiting on the side-lines. In addition, top tier reinsurers have heavily over-earned from benign nat cat years since 2012.
For the P&C reinsurance sector including Lloyd’s and Bermuda the Bernstein analysts expect a marked but manageable capital event. “We estimate there is about $100 billion net earned premium in the sector and according to S&P the average large nat cat losses were 5.6 percent net earned premium (NEP) since 2012.”
The analysts estimate that reinsurers will have about $39 billion of extraordinary losses resulting in a 2017 combined ratio of around 140 percent. “Considering investment income of about $15 billion and an underwriting loss of $40 billion could hence eliminate some $20 billion of conventional capital after tax. This still leaves $20 billion above “A” level capital for the top 20 reinsurers.”
On top of the excess in conventional capital there is $89 billion of alternative capital in the sector. Up to $10 billion might be wiped out by these events plus and addition $5-10 billion trapped until loss estimates become more robust, but this leaves still substantial alternative capital in the market, according to the note. “We expect more professional alternative capital investors to double down on rising rates, but in total a light reduction available for 2018 reinsurance renewals,” the analysts said.