Comment: Sandy’s surprise blow to profits

Comment: Sandy’s surprise blow to profits

Big catastrophes have a habit of hitting while industry conferences are underway, with the most tragic being the September 11 terrorist attacks, which struck during the 2001 Monte Carlo Rendez-Vous.

Delegates looking forward to this year’s Property Casualty Insurers Association of America annual conference in Dana Point, California, surely were not expecting to be tracking a hurricane during the event.

Sandy snuck in near the end of this year’s Atlantic hurricane season, which officially runs from June 1 to November 30. It was the 18th named storm and the 10th hurricane of the season. At the time of going to press at least 113 had died as a result of the storm, including 43 killed in New York City.

Its late arrival was not the only unusual facet of Sandy. It was the largest Atlantic hurricane on record. It also took an unusually sharp turn before striking the coast.

The extent of the destruction wrought was surprising, with large parts of New York shut down and plunged into darkness for days. Another surprising element of the storm is that wind damage was “surprisingly minor”, as Willis Re noted, with storm surge responsible for much of the destruction.

The estimates are already out from some, with Eqecat estimating insured losses of between $10bn and $20bn and AIR Worldwide estimating between $7bn and $15bn. Eqecat doubled its initial estimate of $5bn-$10bn insured losses, made as Sandy was about to strike the east coast, because the subway and electrical outages will lead to bigger losses than it first thought.

But, while Sandy sure packed a punch, its significance to the insurance industry should not be overstated. It will knock a dent into profits, but it won’t ruin 2012 for the vast majority of insurers and reinsurers.

For an example of how afraid of Sandy the large reinsurers are, look no further than Munich Re. Days after Sandy, the German reinsurance giant raised its profit target for the year to 3bn ($3.8bn) from 2.5bn, while announcing profit of 2.7bn for the first nine months of 2012.

This is assuming losses stay within expectations, of course. XL’s reinsurance CEO Jamie Veghte suspects the insured losses may come in even higher than the top end of Eqecat’s $10bn-$20bn loss figure. If he is right that will place Sandy firmly in the number two spot for biggest insured hurricane loss ever. As our news report in this issue shows there will be a number of arguments over coverage that will take months to sort out before the final bill to the industry can be stated with confidence.

Sandy does, however, give the industry a good chance to show why it is there. This is important given a theme that is running through this issue of insurers, reinsurers and even brokers losing relevance in recent years.

XL CEO Mike McGavick has not been shy about voicing his concern that the industry is not doing enough to meet clients’ needs. “We have been serving a smaller and smaller portion of the marketplace,” he says. “Real or perceived, our industry is seen as less relevant to economic growth then we were just 10 years ago. It is a disturbing trend that we as an industry must address.”

As the cover story of our November issue shows, reinsurers have become increasingly concerned that demand for their product is falling. Some of this is to do with the strength of some of their insurance clients. For example, AIG is the most prominent example, cutting back its $1.4bn quota share cover by 25% this year – a result of it feeling sufficiently strong after putting its own house in order over the past few years.

“With fairly healthy balance sheets for primary insurance companies, we have certainly seen that net retentions have been increasing over the past decade,” Mo Tooker, global head of property/casualty treaty at Gen Re, told us. “We see this as a natural occurrence and recognise that reinsurers will be pushed to cover more ‘tail’ risks. We are working hard to respond to this movement and maintain our relevance with customers.”

This phenomenon is mainly in the casualty space, where reinsurers have seen their share of business slip greatly since 2005, meaning they did not enjoy those strong years of profit as well as they might.

But even in the cat space, traditional reinsurers face accusations of not adapting to clients’ needs. Marc Lauricella, partner at TigerRisk, says traditional reinsurers have allowed new capacity to enter by not adapting their approach. Capital from hedge funds, private equity, pension funds and other sources has come into the industry in the past year through vehicles such as new start-ups and sidecars. The low interest rate environment has made the uncorrelated returns in the cat reinsurance market relatively attractive.

“The fact that the traditional market has not been able to bring new to the market has left the door open to new capital,” he says. “It has allowed investors to come into the market without ratings. We believe the new pension fund money is not just a fad. Even in a post low interest rate environment we believe it will not just disappear, in fact it will even keep growing. These pension funds are sitting on vast amounts of money and looking for diversification. If it makes up just 1% or 2% of their capital, that is still a lot of money.”

Do not expect a new class of traditional reinsurers to form in Sandy’s wake. But it may give further encouragement to these new sources of capacity to make a bigger play in the market. This may even serve to give a kick up the backside to traditional firms.

“The new capital coming into the reinsurance business is significant and it will continue to come in,” Rod Fox, CEO of TigerRisk, told Reactions. “It is great for the business.”

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November 2017

 

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