The natural catastrophes that came in very quick succession at the end of the summer this year left a path of devastation and trail of human tragedy behind them. What we also saw, however, was the insurance market doing what it does best - and what we so often forget to tell the world about – help people, companies and even countries re-build and get up and running again.
Many claims were paid rapidly, others are being settled now. Because of this quick response from the insurance and reinsurance market, life for those affected can go on, they can rebuild and the world can keep turning.
From the market’s perspective, August 2017 onwards had all the hallmarks of a watershed year. The continuing soft market has left insurers’ balance sheets starting to creak at the seams. The fact is that rates need to rise to turn the tide.
In August and September, three huge hurricanes, Harvey, Irma, and Maria (HIM) – made landfall in the US. These storms caused destruction from the Texas coast through West Florida to the Caribbean, together causing insured losses estimated to be almost $93 billion, according to Swiss Re.
After 12 years with no major hurricanes making US landfall, HIM have made 2017 the second costliest hurricane season on record after 2005.
The pay-out from claims for hurricanes, combined with other attritional losses looked like an answer to the market’s prayers in the form of firmer pricing. However, despite a momentary stiffening of resolve from some parts of the market, pricing remains largely unchanged due to over-capacity.
The market is currently in an invidious position as it wrestles to find a way out between the proverbial rock and a hard place. The constraints placed on insurers are numerous and unavoidable. They walk a fine line between their Solvency II requirements to maintain capital, their tax obligations, which requires a stream-lined balance sheet, their ability to pay claims and their desire to stash away reserves for a rainy day… but not too many because that’s also a stringent regulatory issue.
It’s a Blancmange market
The fact that the market is over-capitalised is well-documented. And that has not changed. There has been no meaningful reduction in surplus capital yet and without that, the market remains soft. The upcoming renewals at 1/1 will perhaps see some hardening in pockets that have been over-exposed to this year’s hurricane season, notably those who have been writing hull in the Caribbean or those who have suffered low value, high volume attritional losses in the US property market that have led to large dents in the bottom line, yet the rest of the market appears as if it will continue to write business along the same lines ‘as before’.
The fact that there are so few truly independent Lloyd’s syndicates left tells its own story, the rest having sold themselves to company markets with much bigger balance sheets. Yet Lloyd’s has always led the market through challenging times and continues to provide a global platform for specialty risks, offering a franchise for those wanting to write business all over the world. However, the fact that Lloyd’s has such a large amount of company capacity has somewhat hampered its ability to react as nimbly as it may have done in the past.
Reinsurers also fall into two camps: those writing quota share business have to stay lucky, whilst those writing excess of loss business might be hurting or not, depending on which line of business they’ve invested in. The reality of quarterly results means that the market has to survive and adjust, but for the market to shift fundamentally there has to be a point at which companies can no longer hide their short-comings. At some point the money will run out, the losses will accumulate and the claims will diminish reserves completely, but until such time, the market marches doggedly onwards. The reinsurance market is talking up prices of late, but, as one market veteran said: “A lot of pigeons have to come home to roost…and they’re still flying at the moment.”
So, in short, the way to a hard market is not through natural catastrophes, but through a fairly dramatic shrinking of the market as a whole. Currently, the market may harden, but inconsistently. This means that for some companies this year of catastrophes will be an earnings event – there may be a reduction in the payment of dividends, but they can control their losses through earnings. A capital event is much more meaningful and requires companies to dig into their capital reserves, or indeed raise capital, to cover their losses. The insurance market is still a long way away from that at the moment, but for how much longer?
Perversely, in order to recover, the market needs this dramatic reduction in capital to restore some sense of equilibrium. Disciplined underwriting has never been enough on its own to turn the market; it’s always been turned by capacity. Will 2018 see this capacity dissipate or will it continue to see the returns it’s enjoyed in recent years? Time will tell, but time is starting to run out for some…