First-half global catastrophe losses may be “lighter than average” – RBC

The insurance and reinsurance market may face global catastrophe losses of a quantum that is a little “lighter than average” for the first-half of 2022, according to equity analysts at RBC Capital Markets.

But despite this, there is a chance that reinsurance interests don’t see a great deal of benefit from a below average first-half for catastrophe loss activity around the globe, as the secondary peril focus may mean that more of the industry loss falls to reinsurers and reinsurance arrangements anyway, the analysts suggest.

Which has ramifications for the insurance-linked securities (ILS) fund market as well, especially for those exposed to many of the events through proportional and quota share reinsurance or retrocession contracts.

On the flip-side to that, those ILS funds investing in catastrophe bonds, industry loss warranties (ILW’s) and structures that are higher attaching excess-of-loss instruments, are likely to have had a relatively clear first-half, to a completely clean one, as losses go, aside from any secondary market pressures to positions invested in.

The analysts estimate that the second-quarter may only have delivered around $10 billion of global insured losses from catastrophe events.

Saying that, “Catastrophe losses at the industry level have been more muted in Q222 than in Q122 based on our analysis.”

As a result, the analysts believe first-half 2022 catastrophe industry losses may be as low as $22 billion to $24 billion, which is well-below the 11-year average of $34 billion.

Highlighting that figures can be deceiving, of Q1 they said, “However, we would note that whilst Q1 in itself was not overly expensive at an industry level relative to historical norms it did see catastrophe budgets breached at 3 of the 4 European reinsurers.”

The June figures seem a little light, as RBC’s team haven’t added anything for continued US convective and severe thunder storm activity, but overall the directional approach of pegging Q2 and also H1 cat losses as below average seems likely to be something we’ll hear a lot more about over the coming weeks of the re/insurer results season.

On Q2 specifically, the RBC analyst team wrote, “None of these events would be considered to be ‘peak perils’, adding again to the narrative that secondary perils are the biggest cause of uncertainty for the industry.”

They further explained that, “Despite a relatively busy two quarters in terms of the numbers and breadth of events, at an aggregate level we believe that catastrophe losses were actually below recent averages.

“Despite this lighter than average half, we would not assume that that there is a material benefit to the insurers vs assumed catastrophe loss budgets, particularly for the reinsurers. With only relatively few severe losses in the US in the first half of the year, more losses are likely to end up in the reinsurance market in our view, particularly in those markets where the primary market is relatively concentrated.”

One trend that may be in favour of the reinsurance market, is the general shift to higher layers and attachments in the hardening market.

At the mid-year renewals, RBC’s analyst team noted, “In addition to underlying price increases, reinsurance programs were restructured often with reinsurers pushing for higher retentions leading them further away from frequency type losses. This was a theme across multiple geographies.”

This trend should, “help to protect the reinsurers from frequency losses that have been a particular issue in recent years,” the analysts explained.

Which may insulate some from the impacts of this first-half catastrophe activity.

Of course, a lighter than average first-half for insured catastrophe losses really means nothing with some of the major perils such as US hurricane risk, Japan typhoon risk and wildfires all set to peak later this year.

It’s far too early to suggest the slower start will make a huge difference to annual returns, as ever that may come down to how well portfolios have been selected and written.