Secondary catastrophes are affecting the pricing, losses and capacity of the insurance sector; this has made Q1 2022 a lot more eventful and unpredictable, according to Howden Broking.
This accumulation of secondary peril events – which are looking more like primary perils – is happening alongside the war in Ukraine, the Covid-19 pandemic and natural disasters, such as hurricanes, which are causing a liability crisis similar to what happened in the early and mid 2000’s, noted the broker.
“In the past, the first quarter was sometimes considered the quiet quarter, but this has certainly not been the case this year,” said Michelle To, Head of Business Intelligence at Howden Broking.
According to the report, a significant cohort of carriers are experiencing higher than average losses and volatility in the first quarter creating additional pressure to achieve margins for the rest of the year, even before hurricane season.
These have been driven not just by the risks noted above, but also by motor loss frequency, social inflation and higher core inflation coming out of the pandemic.
The war in Ukraine is causing the macroeconomic picture to change significantly, To explained, exacerbating high inflation and interest rates already in place last year.
Losses emanating from the war, examined as percentage of the shareholder capital and percentage of premiums, as seen in the report look relatively manageable. To added: “It’s important to note that these are early loss picks. This said, when you compare them to previous large losses, like Covid, Hurricane Ida and Hurricane Yuri, they currently look lower in comparison.”
David Flandro, Managing Director, Howden Analytics added: “The story isn’t only about losses as a percentage of capital. It’s also about heightened risk premia emanating from the general situation. Look at the widening gap in marine, energy, and aviation gaps between loss-free and loss-affected lines.
“In all three cases, cover for loss-affected programs has risen much more rapidly over the last year. Again, this isn’t due to discernible capital or underwriting losses at a global level. It’s due to changing assumptions about risk and exposure.”
Flandro explained that this is feeding through to reinsurance renewals, most recently at June 1st in Florida, which he noted are the result of changes in risk assumptions, as much as they are of experience.
“This is the first time since 2014 that we haven’t had a named storm in the Atlantic prior to the start of hurricane season. But multiple carriers are scrambling to obtain cover. We have Florida SB- 2D, which aims to provide additional $2 billion of capacity, below the Florida Hurricane Catastrophe Fund $8.5 billion attachment point for hurricane losses.” Flandro said.
He continued: “You’ve heard Michelle and I talk about social inflation, heightened lumber costs, increased secondary peril losses, and contingency fee multipliers in Florida, in the past. All of this is coalescing now, to limit appetite and increase risk premia in a finally balanced market. Add to this higher yields on non-insurance linked fixed incomes securities that compete with the ILS market, and you have a capacity shortage with sharply higher prices.”
To also noted: “We have underwriting losses driven by a range of coalescing factors… This is, of course, creating a dislocated market where we see reinsurance pricing at the first of June renewals experiencing challenges in finding capacity, resulting in continued pricing increases across both primary and reinsurance lines.”