We are now on the cusp of hurricane season. Storm predictions have called for “above average” activity this year; just as we roll out of record setting tornado activity over the last two months. The cushion of excess capacity is gone or nearly gone for most insurers and reinsurers. One more natural disaster could be the tipping point that leads to the turn in the (insurance) pricing cycle.
We know capacity is just a part of the many aspects to take into account when evaluating the reinsurance sector. However, the state of the other factors is not offsetting the capacity. The state of the economy is still on shaky ground; not just here, but in most developing countries.
Investment earnings and interest rates are both exceptionally low. The reinsurance markets are combining, and the surfacing markets are increasing demand. When you add on worries over the coming regulatory changes and cat models pointing to higher loss amounts, you have a combination of events that are impacting the industry.
Since the latter part of 2010, disasters around the world have been slowly eating away at the excess capital most markets had built up over the past few years. It isn’t necessarily an overwhelming number of catastrophes; it’s the degree of severity of the disasters that have taken place.
When you add in billions of dollars in losses from the recent tornado outbreaks it only leaves the market with around six percent of excess capital to work with. One large hurricane, typhoon or another tornado outbreak is all its going to take to deplete that small amount of capacity.
Reinsurers and insurers both will be looking at increasing the rates; not so much as an option, but as a necessity to their business. This could also bring an increase in merger and acquisition activity for both sectors as well.
On the other hand, emerging markets will bring about three-quarters of the global GDP growth over the next decade, and rapid growth like that will need insurance.