With momentous weather events in recent years increasing, it’s important to consider the implications of climate change on the global property reinsurance marketplace.
Reinsurance, also known as insurance for insurers or stop-loss insurance, is the practice of insurers transferring portions of risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. By spreading out the risk in this fashion, insurers can remain solvent by recovering some or all of the amounts paid out to claimants.
With the 2017 storm season being one of the worst storm seasons in history, the global reinsurance market place will be impacted for years to come. These catastrophic natural disasters and weather events can leave behind lasting and expensive property damage and billions of dollars that need to be paid out to claimants.
The record number of major hurricanes, earthquakes, wildfires, and hailstorms made 2017 the third-most expensive year for insured losses. This includes hurricanes in the United States and Caribbean, wildfires in California, earthquakes in Mexico, and hail storms in Texas. In 2017, there were more than $400 billion in losses – translating to $135 billion in insured losses, most as a result of Hurricane Harvey and Hurricane Irma.
The effects of these recent natural disasters on property cannot be underestimated, and after this record year of losses, global property reinsurance prices were expected to rise – however, initial price increases were less than expected in January 2018.
Generally, global reinsurance renewal dates are January 1, April 1, and June/July 1 each year. January 2018 rates showed an increase of 5 percent to 7 percent globally, which was less than expected. April 2018 reinsurance renewals also rose less than expected and continued the trend of single-digit increases. This means that reinsurers will try to obtain more rate increases on future renewals.
The two major forces holding premium increase at bay are insurance-linked securities and fierce competition for businesses. Insurance-linked securities (which act as capital in the insurance market) are financial investment products that are valued based on catastrophic loss events. Insurance-linked securities were first introduced to the financial market in 2001 and have seen upward growth since and the trend has continued even after the performance of insurance-linked securities products in 2017.
Heavy competition is also a major component holding pricing to less than expected growth. All reinsurers are cautious about losing market share, which is having an impact on the increases that are being achieved. In the United States, the property insurance market is seeing some property insurance increases on properties in coastal areas while non-exposed locations remain near expiring terms.
While global reinsurance isn’t a topic of conversation around most boardrooms, it does have a bottom line effect on insurance premiums for businesses. With wild weather and frequent natural disasters becoming more commonplace, it’s critical to stay abreast of changes in the global reinsurance market and understand the impact to your business.
Billion Dollar Disasters*
Northern CA Wildfires
Midwest Tornado Outbreak
*National Oceanic and Atmospheric Administration