Even with the models in surprisingly strong, early agreement on its general track, there is always room for notable swings in landfall track in the latter stages of a storm’s approach.
There is obviously a far more costly outlook should it hit Tampa than anywhere else on the west coast and this scenario creates the highest potential swing factor in the loss, which makes pre-landfall livecat trading and news commentary a game for the brave, or perhaps the foolish.
Forecasts for the storm’s strength as it approached the US quickly intensified heading into the weekend, before later easing back – which illustrates the vagaries of studying hurricanes pre-landfall. (For the superstitious, the I storm names are the most frequently retired of the alphabet.)
But even before that strengthening to a projected major hurricane landfall, there was a sense of unease, because of all the locations that the industry did not want to see a US landfalling storm this year, the Florida market is top of the list (followed by Louisiana).
Even without a major hurricane since Irma, many Floridian insurers have been failing, exiting the state or tightly controlling new policies.
And the reinsurers and ILS funds who bankroll them are curbing their catastrophe appetite in turn, acutely aware of the need to lift their returns after years of underperformance.
It’s notable that while in past years when there have always been some reinsurers who would argue that the market “needed a loss” to push rate, this year there’s been enough optimism on the hardening market even in the dead quiet of August that that suggestion has not been brought forward. Instead, sources express the hope that they will be spared a loss so they can deliver a “clean year” to investors.
However, there is no reason to scaremonger ahead of the storm. Floridians have high levels of reinsurance to cover them for many windstorm scenarios – and arguably at the primary level there would have been a greater chance of immediate stress if there was a major hail or thunderstorm for example, given the proliferation of named perils coverage at this year’s June renewal.
Reinsurers, too, are from a purely financial point of view better prepared to face this loss than in the immediate post-Irma years notwithstanding a temporary drop in capital due to mark-to-market losses. They have made some major changes to their portfolios to tighten up underwriting standards and rates. However, as we discuss below, the key question is whether their capital base will see it this way.
Despite (or perhaps because of) the harder retro markets, meaning they will retain more Florida risk net, after this year’s renewal reinsurers had achieved a higher quality cat portfolio. They took a step back from low-attaching risk – or charged rates that effectively safeguarded them from much risk transfer where they did still participate in it. Credit risk was also minimised versus past years.
With that said, it’s hard for cat risk takers to get credit for a counter-factual scenario. Last year was an aggregate loss year that would have caused worse losses had it hit in 2018 – but it still ultimately comes across as a poor-performing year, not a success story for reduced aggregate exposure.
With this in mind, here are three key questions that will be worrying (re)insurance executives this week as they study the storm track maps:
1. How does this change fundraising conversations and the capital paradigm?
There could be a paradox at play here: if the storm’s losses are relatively minor, will another depressed year of returns put off more investors than the counter-scenario of a major loss? A big loss that ramps up market dislocation could pull in more capital from the sidelines.
Of course, the latter scenario still requires major capital exits, so it implies one where there is a greater divergence between winners and losers than the former ‘everyone loses a bit’ minor-loss scenario. To the extent opportunistic capital does come in, it will be more of a reshaping of the investor base than overall growth in a hard market scenario.
One point worth bearing in mind is that even though the H1 tally for nat-cat loss activity was above average, it has mostly been a favourable year to date for reinsurers specifically. The biggest events so far of the year in Australia and France would have had a higher impact on the whole for the continentals with the strongest capital base versus more fragile ILS and Bermuda markets, or Lloyd’s.
If there is enough headroom to absorb a small Ian loss and still deliver good-enough profits in a year when other asset classes have dived, can this be absorbed? If so, it could keep the market on a faster ramp-up of catastrophe reinsurance rates but still resemble a semblance of the ‘orderly’ renewal brokers hope for.
Or will wary investors look at any Florida landfall or dent in returns as a signal to pull further cards off the table (no matter that Florida’s insurance woes have very little to do with climate change)?
Is a tipping of the supply-demand crunch into a more panicky hard market inevitable?
2. Will this year’s legal reforms count for anything in restraining the impact of the loss?
Ian is not headed for Florida’s most notorious hotspots for assignment-of-benefit lawsuits, but such is the scepticism surrounding the state’s ability to control insurance fraud that this might not be much comfort to (re)insurers.
This will be a huge test of whether this year’s legal reforms, which restricted one-way attorney awards among other things, will deliver. Politicians urged for the market to take the time to see the impact of the reforms before demanding further action – but hurricanes cannot be put off.
The 2017 Hurricane Irma, which was the starting point for much of the current market dislocation, is the posterchild for a loss that the industry felt should have been a much smaller loss than it ultimately was.
Some insurers ran out of private reinsurance headroom on that event. The big question is whether if Ian does turn into a worst-case major loss, the claims that deserve to be paid can be paid if a legal pile-on of claims arises.
3. How does the state of Florida respond to the hit to its finances?
For reinsurers, the reshaping of the Florida market that has occurred in the past six months puts them in a relatively better situation to face Ian than they would have been a year ago. And their gain is largely the state of Florida’s loss.
Citizens has grown and is much more exposed – and went into this hurricane season with far less reinsurance in place than in the past (and attaching at a much higher benchmark than is the case for its private peers).
Florida has of course had a pandemic boost to its surpluses overall, so it is in a better situation than, say, California’s governor facing an earthquake. But will the additional costs it now faces prompt any kind of rethink over further legal reforms or the false economy of stinting on reinsurance for example?
That is a lot of questions to pose as our readers prepare to handle the aftermath of this hurricane, when we should start to get a sense of how the answers may shape up. For now, there is little to do but wait and try not to succumb to wild speculation.
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