Quite a lot didn’t happen in 2014 that spelled both good and bad news for the global insurance industry. The US hurricane season, for example, practically didn’t happen – leaving the industry loss free but stuck in the doldrums.
Insured losses from tropical cyclones are likely to end up around the $3bn mark in 2014, compared with an average of US$24bn, according to Swiss Re. Total insured losses from severe thunderstorms in 2014, on the other hand, topped $12.5bn, according to Property Claims Services.
Following on from a relatively benign cat year in 2013, capital has continued to accumulate in the re/insurance sector, boosted by capital markets investors’ growing appetite for insurance linked securities.
Hedge funds too, have piled into the market, adding to available capital and the pressure on cat prices. Indeed, pricing pressure has found its way to other non-cat lines, as underwriting capital is displaced from peak zones and spilled into working layers and casualty lines.
So, morbid it may be, but a highly active hurricane season would have worked wonders for well diversified reinsurers at least. Costly windstorms beating up the east coast would have taken a wire brush to the cat market, clearing out a lot of capital markets hangers on and boosting prices for everyone.
Yet no major hurricane made landfall in the US, the ninth year running that this has happened.
The absence of US hurricanes isn’t a sign that there’s a let up in climate change, however. Far from it and 2014 turned out to be the hottest year on record: ahead of 2010, 2005 and 1998; fourteen of the fifteen warmest years on record have all occurred in the 21st century.
One nat cat event that no-one wanted was a destructive solar storm. The sun has been in a hyper-active state recently, creating space weather that is capable of frying utility grids and knocking out vital satellites. The National Academy of Sciences estimated that the economic cost of a solar storm that actually happened in 1921 would be USD2 trillion today - for the first four years - with recovery taking up to ten years for the US alone.
Yet at the time of writing, the space weather outlook down on the ground is still fine.
Meanwhile, on planet regulation, plenty of stuff didn’t happen in 2014. Solvency II didn’t materialise though we now know that it will definitely happen on January 1 2016.
Neither did the IAIS and the FSB get their act together on the listing of systemically important reinsurers. Citing a review of methodology, the IAIS said a list of reinsurers will likely be issued in 2015.
It is open to conjecture whether the supervisors stepped back after feeling the wrath of a number of reinsurance CEOs. SCOR boss Denis Kessler was one of the most outspoken critics of the proposal. He told Reactions that the list could create a “flight to systemicity” – in other words creating the very problem it seeks to address.
Regulators failing to act in the UK wasn’t much comfort to the country’s life insurers. They saw share values fall off a cliff after the FCA’s Clive Adamson, director of supervision and a member of the executive committee, glibly told the Daily Telegraph that the regulator was planning an investigation of pensions policies going back to the Seventies.
Investors rightly saw a PPI type scandal looming that would lead to a compensation feeding frenzy and wiped £3bn off shares. In the event the FCA back pedalled furiously and in December, Adamson, as well as two other executives, left the regulator.
An important issue for insurers in the US and UK was the future of their respective government’s terrorism backstops. In the UK, there were concerns that revised funding proposals for Pool Re could impact the availability of cover. In the event, insurers accepted an increase from 10% to 50%.
But in the US, the reauthorisation of Tria didn’t make it in 2014. The bill to extend the terrorism insurance program for six years, and phase in increases in the program trigger from $100 million to $200 million, with other tweaks, was passed by house lawmakers on December 10.
A vote in the Senate was the last small hurdle before the bill reached the president’s desk for signing – and, to most people’s surprise, it fell. Republican senator Tom Coburn from Oklahoma, in his final act as senator, objected to a part of the bill that created a semi-federal licensing programme for insurance agents, permitting them to sell across US state lines.
In a depressing turn of events for the insurance industry, Congress will now need to reintroduce the Bill in both the House and the Senate when they reconvene in the New Year, leaving the door open for more disagreements.