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Irma to put reinsurance alternatives to the test

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MONTE CARLO, Monaco — Losses from Hurricane Irma will likely trigger catastrophe bonds and other insurance-linked securities that will test the burgeoning market’s willingness to pay losses, reinsurance market executives say.

While most expect investors who support the ILS market to accept the Irma losses without litigating claims, it will be the first significant test of the market, which has grown rapidly over the past five years.

Irma is dominating conversations at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco, this week — the traditional beginning of the year-end reinsurance renewal discussions. Most executives at the meeting say pricing trends will not be clear until they get firmer loss figures related to the storm, although some said Irma will likely increase demand for property catastrophe reinsurance and there may be some increases in pricing.

Irma hit the Florida Keys as a Category 4 hurricane on Saturday and made a second landfall in the state just south of Naples, Florida, on Sunday as a Category 3 storm, before weakening further to a tropical storm as of Monday morning as it progressed up the state.

Modeling firm AIR Worldwide, a Boston-based unit of Verisk Analytics Inc., on Sunday estimated that total insured losses from the storm would be between $20 billion and $40 billion, which would be considerably less than had been feared if the storm had hit Florida’s east coast near Miami.

Still, Irma is the first major hurricane to hit the state since the big influx of alternative capital started entering the reinsurance market about a decade ago.

“After a long stretch of relatively benign catastrophe activity, we will see the industry being tested in the way that it’s transformed itself over the past five to 10 years,” said Stephan Ruoff, CEO of Tokio Millennium Re A.G., a Zurich-based unit of Tokio Marine Group.

The storm will likely trigger losses for ILS-based facilities, and cedents will be observing the alternative capital providers to see whether they will pay or dispute valid claims, he said.

“We’ve been a pioneer in bringing alternative capital to the market, so we think it will respond as traditional reinsurers have responded,” Mr. Ruoff said.

Of the $24 billion of in-force catastrophe bonds, $11.3 billion have Florida exposure, said David Priebe, vice chairman of Guy Carpenter & Co. L.L.C. in New York. However, it’s unclear how many of the bonds will be triggered if Irma losses are in the lower end of the current loss estimates, he said.

“I’m pretty confident that if they are triggered, the mechanism will prove that it’s a very effective way to deliver capital and claims payments to sponsors,” he said. “I spoke with about a half dozen investors when Irma was a Category 5, and they all made it clear that this was a scenario that they really understood and realized the potential of the risk.”

The limited history of claims payments by ILS vehicles would indicate that valid claims will be paid quickly, Ulrich Wallin, chairman of the board of management of German reinsurer Hannover Re S.E.

“We have a facility that dates back to the mid-1990s, and in that facility we had the World Trade Center losses, we had (Katrina, Wilma and Rita) hurricanes, and we had the losses in 2011 where we collected a fair amount of principal from our investors, and we were able to do that without problems,” he said. “Time will tell. For the longevity of the ILS market, a reasonable approach to the claims will determine the future of that market.”

The Irma loss will likely trigger higher demand for property catastrophe reinsurance for Florida risks, Mr. Wallin said.

Hannover Re cut back its exposure to Florida after the 2005 hurricanes, said Jürgen Gräber, head of property/casualty coordination and global reinsurance. Hannover Re’s worldwide market share is between 4% and 4.5% of the reinsurance market, “and in Florida it is well below 2%,” he said.

But any price increases will likely be limited, said Steve Hearn, group CEO of Ed Broking Group Ltd. in London.

“With the estimates that we are starting to see, this is not a market-changing event. If you see any impact, it will be modest and brief,” Mr. Hearn said.

If rate increases for Florida property catastrophe business are only in the single digits, new capital will likely not rush into the market, he said.

With a market loss of $20 billion to $40 billion, Irma will be “an earnings event and maybe a capital-eroding event,” said Mr. Priebe of Guy Carpenter. “We currently think there will be broad-based market pressure to adjust rates upward,” he added.