Hurricane Matthew was the most significant windstorm to affect the United States since Sandy in 2012. It is estimated to result in $4 to $7 billion in property insurance losses. In this article, Milliman actuary Aaron Koch considers the effect that Matthew may have on the insurance-linked securities (ILS) market and alternative capital investors. He also offers perspective on whether the storm will have any influence on United States property catastrophe reinsurance rates which have decreased in the last several years.
Here is an excerpt from the article:
Based on the impact profile of Matthew, we expect two sets of loss impacts to ILS fund valuations based on the storm:
1. Minor realized losses on collateralized reinsurance per-occurrence layers and sidecars
We might expect a minor to moderate amount of losses on the lowest layers of collateralized reinsurance programs. Key driving factors to consider include the proportion of economic loss that ends up being excluded by residential policies given the flood-heavy nature of the storm; a fund’s exposure to Florida-only writers versus those that are diversified across the Southeast (and thus potentially exposed to a larger proportion of the storm’s impact); and any limits that are written in the Caribbean, which suffered direct landfalls from Matthew across several countries, including Haiti and the Bahamas.
2. Minor writedowns on collateralized reinsurance aggregate layers and aggregate ILS deals
We expect that Matthew’s broader impact might be across the set of deals where Matthew will contribute towards an overall aggregated retention. Even if Matthew is not itself strong enough to trigger a loss to certain catastrophe bonds, ILWs, and collateralized reinsurance contracts with aggregates, we do expect that it will often exceed these contracts’ deductibles (in either standard or franchise form) to accrue a portion of the loss needed to erode the aggregate retention.
In these cases, the erosion of part of the aggregate retention makes the contract more susceptible to suffering loss over the remainder of the contract period (i.e., if future major loss events were to occur). As a result, the valuation of these contracts should see a slight negative impact from Matthew.
Fortunately, Matthew comes relatively late in the hurricane season. Thus – with the exception of multiple-year contracts – there is a correspondingly lower chance of additional U.S. wind events pushing the loss above the aggregate retention. As such, we can expect Matthew’s negative impacts on fair value estimates to be relatively small and to reverse quickly back up to full value assuming that no further events occur this year.