How will the disasters of 2017 impact my property insurance in 2018? - by Neil Doherty

2017 was the costliest year on record for losses insured and uninsured, but the insurance industry is well positioned to handle the high volume or claims payouts. Most buyers of property insurance are well positioned, but preparation is still needed. 

2017 experienced historic losses, according to Aon Benfield:

• Economic cost $353 billion;

• Insured cost $234 billion;

• Costliest year ever recorded for weather disasters $344 billion; and

• Costliest year for insurers for weather disasters $132 billion.

Even with these new historic loss levels, the industry is more prepared to withstand global catastrophic losses than in recent history. With an all-time high policyholder surplus of more than USD $700B, the industry remains in strong financial condition.

One of the factors strengthening the industry is the influx of alternative capital. According to the Insurance Information Institute, alternative reinsurance capital is characterized by two twists on the traditional reinsurance arrangement. 

First, a new breed of investor is seeking out the reinsurance market—hedge funds, sovereign wealth funds, pensions and mutual funds. Second, the deals are structured differently. The new arrangements—catastrophe bonds, collateralized reinsurance and reinsurance sidecars—tend to isolate the investment from the rest of the capital supporting a reinsurer, thereby allowing the capital to enter and exit the market quickly.

• Total alternative capital had increased to $89 billion prior to the impact of the 2017 hurricanes, up from less than $10 billion in 2005.

• This sector now plays a much more significant role in the global retrocession and US property catastrophe reinsurance markets and therefore incurred sizeable losses as a result of recent events. While assets under management dipped to USD $82 billion at Sept. 30, 2017, this total still represented a small increase relative to the beginning of the year. 

What can be expected in terms of property capacity in 2018 following 2017 events?

The losses seen in 2017 were and are, largely, earnings events, not capital events for the P&C industry. This means that property capacity, along with industry capacity remains high. 

Will reinsurance be impacted by the losses in 2017 and how may that impact me as a buyer?

It is worth noting, again that the insurance industry was well positioned to handle the cost of the 2017 disasters. Global reinsurer capital was a record USD $600 billion at the end of third quarter 2017. 

Here is a summary of things to consider:

• Pricing: Following poor 2016 results and significant catastrophic loss activity to date carriers will seek rate increases across their portfolios.

• Limits: Meaningful changes to limits are not expected for most buyers.

• Deductibles: While many buyers will continue to maintain current deductibles/retentions others will need to take on larger retentions to counter premium increases.

• Coverage: Cyber Property cover will continue to be underwritten carefully as uncertainty in the space continues. No meaningful changes to other coverages expected.

• Capacity: If rate pressure is sustained, no retraction in capacity is expected.

• Losses: 2017 CAT losses, while high, must be viewed against specific account loss activity and against the backdrop of record industry capital levels of $700 billion and less than anticipated increases in reinsurance costs for most treaty renewals at 1/1/18.

How can I best position my account for the upcoming renewal?

Better preparation and planning helps to drive better results; start earlier than you normally would. If impacted by the events of 2017, understand your losses, so you can support market discussions in as great of detail as possible. Be open to new approaches to solve problems: mitigation strategies, retention levels, to program structure, limits, deductibles and alternative markets. Dynamic market conditions will bring fluidity to all clients, with prevailing market conditions only becoming clear after several quarters of renewals in 2018. For an overwhelming majority of risks, market choice remains abundant and choice will yield options.

Neil Doherty is senior vice president at Aon, Boston, Mass.