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SAN DIEGO — There was general agreement among executives attending the Wholesale & Specialty Insurance Association’s 2017 Annual Marketplace last week that hurricanes Harvey and Irma would impact the market — but not on how severe or widespread that impact would be.
The major issue is whether the hurricanes will deplete capital in the insurance market to the point that it would lead to property or even casualty rate hikes in the current soft market, said executives, who spoke when only preliminary estimates of the losses had been released.
Another question is how the alternative capital markets will react once they are faced with catastrophe losses in what up until now has been a lucrative business.
David J. Bresnahan, Boston-based executive vice president of Berkshire Hathaway Specialty Insurance Co., said, “You’re thinking about a pretty sizeable capital even for the market, and I do think it will change and result in firming in the property market” if total losses end up being at the upper end of current estimates.
“The reason I say that is property underwriters and the carriers have been taking cat rates and cat premiums and they’ve been using it to subsidize attritional losses, like regular fire losses, and they’ve been using it to subsidize at times third-party long-tail liability lines,” said Mr. Bresnahan.
“And so, if you have a fundamentally weak performing business, which I think was the case in the property market before the storms hit, and then you add $60 to $65 billion of new cat losses, then that should technically result in a firming property market,” he said.
“You’re now beginning to have a little bit of uncertainty creeping into the market” in terms of how big the losses will be, whether they will drive up reinsurance costs “and are there any players that aren’t going to be able to make good on claims?” he added.
“The real question will be, is it a capital-depleting event?” said Scott Barraclough, president and CEO of Mount Laurel, New Jersey-based Admiral Insurance Group, a unit of W.R. Berkley Corp.
“There’s so much excess capital, it’s unlikely” there would be enough capital depleted “to make it a meaningful change, but I guess you never really know,” he said.
An immediate hard market because of the storms is unlikely, because there is so much capital in the industry, he said. But, you have to evaluate the risk-reward equation, “and sometimes events like this bring that front and center, so I think carriers short term could re-evaluate the risk-reward, which could have an incremental change in the market,” although it would not be widespread, he said.
While “it’s not going to be overnight, the property rates for the reinsurers will be affected first, so the reinsurance rates will definitely change,” said Alan Jay Kaufman, chairman, president and CEO of H.W. Kaufman Financial Group, the Farmington Hills, Michigan-based parent company of wholesaler and underwriting manager Burns & Wilcox Ltd.
“There will be a trickle-down effect, and I think the effect will be regional first, and from there it’ll expand, depending on capacity and the depth of the losses, which at this point hasn’t been ascertained,” he said.
Ian Gormley, London-based managing director of risk solutions for BMS Group Ltd., said “it feels like it’s going to be more of an earnings event” rather than a capital event. “I don’t think we’re going to see this huge amount of capacity driven out, but the pricing has been challenging for some time,” he said. There could be rate increases for catastrophe-exposed business in Florida or Texas, but beyond that, “I don’t see casualty being impacted,” he said.
Scott M. Purviance, chief operating officer for Charlotte, North Carolina-based AmWINS Group Inc., said, “The property pricing was pretty much at the bottom of the market before the storms.” It “doesn’t take a brilliant insurance person to say you can expect prices to change upward,” although it is likely to be gradual rather than spike, “and to some degree gradual is better.”
As for casualty, he said, “at the end of the day, there’s pressure on profitability.” Insurers “will try to use it as a catalyst. Whether it will stick or not is a question at this stage.” There are “not a lot of redundant reserves to be bled into the earnings, so maybe this is the catalyst,” he added.
The hurricanes were not just a property event, said Gregory May, vice president of excess casualty for Allied World Insurance Co. in New York. “I think it’s an industry event. I think reinsurance is going to feel it, direct property insurance is going to feel it” and so will auto physical damage, among other lines, he said — noting that dump trucks cost $120,000 each, so if a company has 10 of those, “it’s a pretty big claim.”
As to its impact, “it may not move the needle much,” but “perhaps it’ll scare or frighten or kind of at least put the thought in people’s minds” that “maybe we’re being a little too cavalier” with property pricing. It may not result in a direct hardening of the property market, but it may give underwriters “some pause,” he said.
Effect on alternative capital
During a session at the conference, Peter J. Barrett, chairman of London-based Bell & Clements Ltd., a Lloyd’s of London broker and Munich Reinsurance Co. unit, said the hurricanes should “drive some thought processes.” As to whether they will lead to a hardening market, “I wouldn’t dare say that, but I think people should at least give a pause for the thought the potential is there.”
Some observers also questioned the hurricanes’ impact on the insurance-linked securities market. “The interesting thing will be what the investment capital that has come into the property cat market does,” Mr. Barraclough said. “I think they certainly knew the potential for storms, but they didn’t really understand the magnitude of these events,” he said. “It’ll be interesting to see how they react where that dries up some capital.”
Hank Haldeman, president of Anaheim, California-based excess and surplus lines broker G.J. Sullivan Co., said he expects “that at least to some degree, some of the insurance-linked securities out there that have been relatively untouched thus far will probably get touched, and it’ll be interesting to see the reaction of the capital markets that support the (insurance-lined securities market) to actually having to pay some significant loss. It’ll be interesting to see how those markets do react, and whether that money is replenished or not.”
SAN DIEGO — It is still too early to determine whether hurricanes Harvey and Irma will lead to a hardening insurance market, but the catastrophic events should give the industry pause, experts say.