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NEW YORK (Reuters Breakingviews): Natural disasters have put reinsurers on the back foot this year. But excess capital may be their biggest risk. Hurricanes and wildfires doubled catastrophe-related insurance claims to an estimated $136 billion in 2017, according to Swiss Re. That resulted in poor returns for the industry. But a surfeit of investors looking for uncorrelated returns keeps the cash flooding in.
As climate change keeps increasing the planet’s temperature, seas will rise, storms become more violent and weather more erratic. Increased economic development along coasts and in fire-prone areas is increasing losses as well. These trends are easily shown in the data. This year marks the third time since 2005 that natural catastrophe-related claims will exceed $100 billion, according to Swiss Re. Between 1970 and 1985, annual losses never topped $10 billion.
The worldwide deluge of easy money, meanwhile, has kept yields on bonds low, making it harder for investors to make a buck. Combined with losses it makes for an awful combination. Analysts think the return on equity for the global reinsurance industry in 2017 will probably be around a big fat zero. The Eurekahedge ILS Advisers Index, which tracks funds investing in insurance-linked securities, reinsurance-linked debt and catastrophe bonds, is so far down 6.8 percent this year, putting it on pace for its worst showing in a decade by far.
Normally, fires and flood cleanse the industry. Weak companies are forced into mergers and surviving firms are more cautious. Prices then rise, followed by returns. That’s not happening because big reinsurance firms remain well capitalized. Institutional investors still have only about 1 percent of their assets in catastrophe bonds and related investments and are looking to up the figure. And the sector has little linkage to other investments, adding to their allure.
Add it up, and the industry could be hit by another bad year. Reinsurers would probably have a return on equity of 7 percent in 2018 assuming an average amount of losses, estimates Fitch. Even that barely covers their cost of capital. So counting on typical weather in an increasingly abnormal climate sounds like a bad idea.
ZURICH (Reuters): Swiss Re AG estimates that global insured losses from catastrophes in 2017 will hit $136 billion, the third-highest on record for the sector, with the United States hardest hit, it said.
Total economic losses from natural and man-made disasters in 2017 are estimated to be $306 billion, up from $188 billion in 2016, Swiss Re said in a statement, quoting preliminary data.
“The accumulation of economic and insured losses ramped up in the second half of the year, due primarily to the three hurricanes – Harvey, Irma and Maria – that hit the U.S. and the Caribbean, and wildfires in California,” Swiss Re said.
More than 11,000 people had died or gone missing in disaster events this year, the world’s second-biggest reinsurer said.
