Executive Summary: Reinsurance Proves Its Worth
Based on current Impact Forecasting estimates, natural catastrophe events caused economic losses of around USD320 billion globally in 2017...
Insured losses, covered in both the private market and by government-sponsored programs, are estimated at USD128 billion, making it the third most costly year behind 2011 and 2005.
The insurance recovery ratio of 40 percent once again highlights the protection gap evident in even the most developed markets. As in 2005, the main driver of losses in 2017 was three Atlantic hurricanes in the third quarter – Harvey, Irma and Maria – which are estimated to have caused economic losses of USD200 billion and insured losses of USD80 billion.
Record-breaking wildfires in California rounded-out the year. The ultimate size and distribution of claims from these recent events remains uncertain, but it is already apparent that they are manageable and well-spread. The continuity and responsiveness demonstrated by the industry has clearly benefitted policyholders.
The scale of the reinsured portion of these losses is difficult to determine, partly because most providers of reinsurance capacity also write insurance business. However, it is clear that traditional reinsurers were well-capitalized going into these events and that, relative to 2005, more risk was being retained by primary insurers and more catastrophe exposure had been laid-off into the capital markets.
As a result, the losses in 2017 have been absorbed without compromising the availability of reinsurance capacity. Recent events provide the first real test of an alternative capital sector that supplied almost USD90 billion of capacity in 2017, up from only USD10 billion in 2005. Significant funds backing fully collateralized reinsurance and retrocession contracts have been lost or trapped, but investors have responded by showing strong appetite for an asset class that is now viewed as being relatively more attractive.
The sector has therefore proved its worth and come of age as a committed source of reinsurance capacity. Against this backdrop, the January renewals were late, but orderly, with strong competition evident in many sectors. Reinsurance pricing has moved up in lines and territories most affected by recent losses, but we expect this trend to be relatively short-lived, given the amount of new capital entering the sector. This may have long-term consequences for the structure of the reinsurance market.
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