Why is there still such a large gap between the overall 2017 cat loss estimates and what companies are reporting?

Mind the gap

As the fourth quarter result season draws to a close, the gap between disclosed and anticipated industry losses that emerged last year continues to be a cause of contention.

Some carriers must have breathed a sigh of relief as the losses from the 2017 third quarter catastrophes, while not the market turning events that (re)insurers hoped, were revised downwards by many. 

This trend was particularly visible amongst Bermudians - Partner Re said its losses from Hurricanes Harvey, Irma and Maria narrowed by $23mn from its initial estimates.

Argo shaved off $7.6mn for the quarter from its pre-announced estimates of $37.5mn, but the Bermudian was impacted by $4.4mn of catastrophe related premium charges.

Arch also offset its 2017 result with a $69.1mn write down on its expected claims bill from the Hurricanes that rocked the industry in the third quarter.

Everest Re reduced its pre-announced cat losses of $1.2bn for Harvey, Irma, Maria and the Mexican quakes by $132.7mn.

There were exceptions, however, such as Markel CATco. The market leader for collateralised retro pillar protections - raised £2.5bn from investors late last year before then saying in January that Q3 loss deterioration would hit its funds’ NAV by a further 3.6 percent. It also said that the 4Q California wildfires would cost the funds’ a 14.4 percent hit to NAV - even higher than the aggregate for its Q3 losses.

This was unusual. While loss estimates for the three Q3 storms in aggregate range from $80bn-$100bn+, the California wildfires are expected to cost the industry in the range of $12bn. Nonetheless, the cost of the wildfires was a major theme in this reporting season.

For example, London-listed Lancashire, saw its share price tumble nearly 10 percent after it posted a $3.2mn pre-tax loss for the fourth quarter as the group’s $34.5mn wildfire bill pushed its combined ratio to 119.5 percent.

The wildfires cost Fairfax - through its numerous subsidiaries including Brit and Allied World - a total of $185.4mn.

Swiss Re took a $400mn hit from the Californian wildfires, contributing to a $1.2bn P&C loss for the year for the year.

The Japanese-owned carrier MS Amlin booked £171mn in losses from the two Californian wildfires.

RenRe had a $154.4mn bill from the California wildfires, with the October wildfire in northern regions of the state accounting for $90mn of the losses incurred.

However, while the wildfire losses offset some of the insured loss gap from last year’s loss events, there remains major discrepancies between industry estimates and what carriers are reporting.

Aon Benfield last month upped its calculations of insured losses for 2017 from $128bn to $134bn, just slightly less than Willis Re’s $136bn estimates and JLT Re’s $140bn, but well above Guy Carpenter’s $113.5bn forecast.

As the divergences of loss estimates and carriers losses become clearer, risk modeling experts explained to re-Insurance.com some of the reasons behind the fluctuations.

Michael Young, vice president of product management at RMS said that industry loss estimates do tend to increase in the months following an event.

“Industry estimates are iterated upon every two months until final and there is no indication yet when final estimates [for 2017 losses] can be expected,” Young said.

He explained that for the third quarter hurricanes, there are a number of factors at play that are affecting the final loss numbers, including the impact of contingent business interruption, lawsuits that continue to develop through the Assignment of Benefits issue in Florida and Loss Adjustment Expenses (LAE).

Young said that LAE costs in particular can skew estimates with many firms reporting LAE run rates of around 25 percent to 30 percent - compared to the usual 10 percent  - because of large numbers of below deductible claims in Florida. He added that there had also been an escalation of adjustor daily rates in response to the shortage from Harvey and Irma.

Adam Podlaha, head of Aon Benfield’s Impact Forecasting told re-Insurance.com that following large scale catastrophes such as Harvey, Irma and Maria the insurance market places too much emphasis on industry estimates in the wake of an event, when he said attention should focused on individual carrier’s exposure and losses.

Podlaha stressed that in order to accurately model a risk and forecast the possible insured loss it is imperative that the potential event itself is modeled as well as incorporating data from past events into forecasts.

“This gives you a very event specific estimate,” Podlaha said.

While the revised losses witnessed in fourth quarter results begin to bridge the gap somewhat, the dissemblance between the two has been called out by JLT Re.

The reinsurance broker questioned the credibility of the major risk modelling firms after they failed to reach a consensus on the cost to the industry of hurricanes hitting one of the best-mapped corners of the planet.

As the fourth quarter reporting draws to a close, all eyes will be on the final loss figures for 2017 and how these compare to estimates…