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A string of natural disasters from Hurricane Harvey in the US to earthquakes in Mexico have left the insurance industry facing one of its most expensive years on record.
The catastrophes have wiped more than $35bn from insurers’ profits, according to a Financial Times analysis of third-quarter results that have laid bare the scale of the damage. Berkshire Hathaway, run by billionaire Warren Buffett, and AIG were among the hardest hit in the US, while in Europe Swiss Re and Munich Re face large claims. Lloyd’s, the London-based insurance market, expects to pay out a total of $4.5bn.
Insurers say the final cost is likely to be larger and push up premiums. Commercial insurance and reinsurance have suffered from years of falling rates, as excess capacity and a lack of big claims combined to drive prices down.
“The losses have been extensive across reinsurance, commercial insurance and personal lines,” said Kurt Karl, chief economist at Swiss Re. “There were $20bn of natural catastrophe losses across the industry in the first half. Hurricanes Harvey, Irma and Maria, combined with the earthquakes in Mexico, will create about $95bn of insured losses.”
Added together, the industry is facing more than $110bn of insured losses from natural catastrophes. Only 2005 — when Hurricane Katrina hit the US — and 2011 — when there were earthquakes in Japan and New Zealand — were more costly.
The $35bn figure, taken from company reports, does not include losses from unlisted companies, or from insurance-linked securities in which investors’ capital is used to directly back insurance risk.
While this year is now expected to be a turning point for premiums, there are divisions over how widespread any price rises will be.
Industry veteran Stephen Catlin says: “It is safe to say that we have bottomed out, and it is safe to say that there will be some increase in pricing, but maybe not in non-loss affected areas.”
By contrast, Mr Karl thinks the price rises will be more widespread: “In loss affected areas we expect big price increases, but it looks likely that they will spread to other areas.”
He adds: “Pricing has been very challenging for the past two years, and when prices are very low going into a large natural catastrophe year you are likely to see a more general price increase. It won’t just be in reinsurance but also in primary insurance.”
Insurers will certainly be aiming for higher prices. On a call with analysts, AIG chief executive Brian Duperreault said: “Our goal is to achieve double-digit rate increases on a risk-adjusted basis.”
Others say that those sorts of increases are already coming through. UK-based insurer Hiscox said last week it was seeing premiums rising 50 per cent on some lines of business. The effect on premiums will be shaped by how the burgeoning market for insurance-linked securities reacts. Investors such as pension funds are increasingly putting their money into these securities, as a way of diversifying their portfolios.
If the recent spate of disasters — and associated losses on the securities — scares them away, say insurers, prices have a better chance of rising.
But Urs Ramseier, chief executive of ILS fund manager Twelve Capital, says that is not happening. “There is a lot of appetite out there from pension funds, despite the losses. Most existing investors are topping up, and there are new investors waiting on the sidelines.”