The Insurer in Full: The right kind of pain

For cat underwriters treading the fine line between the pain of further losses in a mounting year of attritional hits and the promise of a sustained hard market, Laura looks like fitting the bill as a manageable momentum builder...

That certainly seemed to be the take of investors last week, with stocks edging down as the hurricane approached and concerns lingered over a shift towards the Houston area, then trading up when it made landfall at record strength for Louisiana, in a lightly populated area.

For the equity markets, the promise of hard or hardening price conditions lasting longer outweighs the short-term impact of another round of (relatively) middling cat losses in quarterly earnings.

But the hits keep coming. Sources have estimated that following the MidWest Derecho earlier this month, Hurricane Isaias and a large number of events in the hundreds of millions of dollars to $1bn+ range from convective storms, North American cat losses in 2020 likely run north of $40bn, including Laura.

The distribution of those losses has been weighted to retained primary insurance losses, but reinsurers are not being spared.

Last week live cat trading looked possible for Laura at one stage as the cone of uncertainty around the storm had it potentially hitting Houston as a Cat 3 or 4 hurricane and (re)insurers considered additional cover.

Deals were not done (potential buyers were not interested in the pricing at the $15bn level and the risk subsided), but the interest may have reflected the nervousness of carriers that have been hit by attritional losses and Covid-19 this year.

With several peak weeks left of an already active North Atlantic hurricane season, and wildfires burning before the real wildfire season even starts, there will be plenty more nervous moments to come.

Even though it has a relatively higher weighting towards reinsurance-reliant carriers in its homeowners market, Louisiana is certainly not Florida.

That means Laura’s impact is likely to be seen as an incremental push behind reinsurers in their pursuit of meaningful rate increases at 1.1. Or as one source put it, the right kind of pain.

Psychological shift

Momentum is clearly mounting, and the psychology has shifted.

While in the soft market beleaguered reinsurers conceded year after year of rate reductions for US cat, the last year – driven by Florida – has seen the tide turn.

Underwriters have become increasingly emboldened with the realization that they can push for rate and get it in an environment where capacity has tightened, including from collateralized writers.

The big question in the months leading up to the key 1 January renewal, however, is whether the swell that has lifted pricing in US cat and other loss-affected markets such as Japan has sufficient force to overcome the resistance of European insurers, especially for wind renewals.

The signs right now are that it does not, at least in a meaningful way.

But all that could change very quickly. The 2020 hurricane season may be alphabetically advanced, but there has not yet been a major hurricane threat to Florida.

In a property reinsurance sector teetering on the edge of a real hard market, with an already hard retro market, a Laura strength storm barreling towards Miami would be a game changer.

Of course, that could bring too much of the wrong kind of pain. It could also be the capital event that ends the argument over 1.1, for global property cat and a range of other reinsurance lines that have been in the balance between hardening and hard…

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