Property and casualty insurers craving respite from a long-running drop in prices are eyeing the start of the U.S. hurricane season next week in the hope that summer windstorms will finally turn the market.
The June 1 to Nov. 30 hurricane season, when violent storms form off the south-eastern U.S. coast, could prove a tipping point for an industry that has been forced by stiff competition and excess capacity to cut or hold prices since 2008.
Insurers and reinsurers absorbed some $50 billion in catastrophe claims in the first quarter, more than they paid out in all of 2010, after an unprecedented run of disasters including the Japanese earthquake, according to data compiled by credit rating agency A.M. Best and reinsurer Swiss Re.
The industry has taken another multi-billion dollar hit from U.S. tornadoes in April and May, and analysts say an additional big hurricane loss could be the final straw that forces it to hike prices in order to preserve capital and rebuild profits.
“It’s only a large U.S. event that can turn things around. The U.S. is the biggest insurance market with the biggest exposures,” said Amit Kumar, an analyst at Macquarie in New York.
The pricing impact of the Japanese quake and other disasters this year has so far been confined to directly-affected markets such as catastrophe reinsurance, where the cost of cover is up by between 10 and 15 percent, analysts and brokers say.
But the industry’s weakened financial position means any big U.S. windstorm loss this summer is more likely to trigger a broader rise in prices than in previous years.
While analysts estimated a year ago that hurricane claims would need to top $40 billion to shift prices, the threshold this year could be less than half that.
“Maybe as low as $20 billion would be enough. You’ve got fairly marginal profitability in a lot of the U.S. industry and quite a lot of reinsurers that are somewhat impaired,” said Ben Cohen, an analyst at stockbroker Collins Stewart in London.
Other analysts reckon a loss of $50 billion or more would be needed to turn the market convincingly, as most insurers and reinsurers are still well capitalized, and many retain the ability to raise fresh funds if necessary.
Even a $20 billion hurricane would be a standout event, ranking as the third-most destructive storm on record, according to Swiss Re.
But with forecasters unanimously predicting a more active than usual hurricane season, it would be unwise to rule out a market-moving loss this summer, analysts say.
Forecaster Tropical Storm Risk on Tuesday said it expected four major hurricanes this year, compared with a long-term average of three, with a 59 percent chance of an above-average number of storms hitting the U.S. coastline.
Hurricane losses in 2009 and 2010 were negligible as none of the storms that formed over the western Atlantic made landfall, but insurers’ luck is unlikely to hold for a third year.
There has not been an unbroken run of three hurricane-free summers in the U.S. since the 1860s, according to Weather Services International, another forecaster.
Developments elsewhere in the industry mean that this year, even a moderate hurricane could have a bigger impact than usual on pricing.
A recent update to risk modeling firm RMS’s hurricane model — used across industry to estimate the likely financial impact of storms — has led to sharply higher estimated losses, giving insurers an additional strong incentive to raise prices.
“Long-term you’re going to have pricing going up – maybe as early as the half year renewals. Natural disasters or any other capital-depletion event would be good for the industry,” said analyst Brett Horn at Chicago-based research house Morning Star.
(Editing by David Cowell)
Was this article valuable?
Here are more articles you may enjoy.