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Business focus: How Irma’s putting the wind up City insurers

Michael Bow
Monte Carlo is home to the annual rendez-vous of reinsurers

Every year the sun-kissed streets of Monte Carlo play host to thousands of insurance brokers and re-insurers, who meet for the industry’s annual convention to thrash out the future direction of the market.

The buck stops here, with reinsurers acting as the backstop for the billions of claims insurers need to pay every year.

But this year’s event has played out against a darker backdrop: the looming fallout from Hurricane Irma, which has cost lives and left many thousands homeless.

Away from the human tragedy, global insurers are revving up their spreadsheets to help pay out claims and the Lloyd’s of London market resembles the Met Office.

The hurricane’s swerve west away from Miami caused less devastation than first feared.

Hurricane Irma was predicted to be the costliest disaster on record but losses are now expected to be between $20 billion (£15.2 billion) and $40 billion.

Yet the losses from the disaster are still likely to blow a Category 5 hurricane through the market over the next few months.

“Hurricanes Irma and Harvey constitute the biggest event for the sector probably since 2011, it has the potential to shake things up” said David Flandro from JLT Re, which helps insurers buy from reinsurers.

That shake-up is likely to range on two fronts: a spike in rates (the amount insurers pay reinsurers for insurance) and a sea change in the type of companies putting money to work in the market.

Reinsurance renewal rates have been declining for the past six years due to an influx of capital but Irma could change all that.

Some of the big “chocolate” reinsurers like Hannover Re, Swiss Re and Munich Re — so-called because of their base in chocolate- producing countries — were at Monte Carlo yesterday saying as much.

“This event will certainly have tremendous implications on the market. Irma has the potential to be a market-changing event, definitely in the US where we will see significant adjustments of prices and conditions, but also in many other parts of the world,” said Munich Re board member Torsten Jeworrek.

No one will put a figure on the size of the increase, but it’s likely to rise for certain types of insurance in the US especially.

Another consequence could be an exodus of pension and hedge funds who over the past six years have ploughed into the sector to get a decent return.

No one likes to lose money, and if Irma means that these newcomers — who have seen an unbroken streak of low claims — see payouts hitting their returns they could rush for the exits.

One of the most popular vehicles for investing in insurance is catastrophe bonds, which pay investors their money back alongside regular interest payments if there are no claims to pay.

There’s around $25 billion worth of cat bonds outstanding currently and half have some form of exposure to Florida, meaning some investors are likely to lose at least some of their principal.

However, JLT’s Flandro said most investors in the market were “pretty sophisticated” and could take advantage of a shake-up of the cat bonds market.

“My feeling is they’re going to reload pretty quickly,” he said. “There’s possibly some hot money left in the market but it’s quite small. If any of the cat bonds are triggered we think they’ll come back in pretty quickly.”

Most of the losses from Irma will flow through the traditional reinsurance hotspots like Lloyd’s and Bermuda, but the psychological reaction could perhaps be more pressing for Lime Street post-Irma.

“It’s only half-way through the hurricane season and we’ve already had one of the most expensive years ever,” said Hiscox chief Bronek Masojada from London. “People are on edge. There will be a nervous six to eight weeks ahead.”

Lloyd’s of London — which paid out $1.4 billion in natural disaster claims last year — said it did not consider Harvey and Irma a “market-turning event” although that situation “could change”.

As the big-hitters board their flights back to London, the Monaco sunshine will soon seem a distant memory.