2017-09-09 - Av Henrik Sjöholm

Irma may not be a worst case, but still major insurance event

Despite uncertainty regarding the exact path will hurricane Irma be a major insurance event and is likely to affect one or more cat bonds. In any case, a short-term effect is expected on cat bond funds, including Entropics Cat Bond Fund, as indicative pricing reflect uncertainty before landfall.

Though current forecasts by the NHC indicate a landfall in Western Florida, rather than in Miami, large insurance losses are expected. Estimates by Entropics’ commercial partner AIR Worldwide indicate insurance losses in the range 20-65 billion USD in United States and Caribbean islands. Should the forecast track shift back towards Miami, insured losses could exceed 100 billion USD.

Market reactions

The uncertainty about the exact path and impact of Irma is reflected in the secondary market. Despite few transactions in the bonds concerned, we have seen both bid and ask prices come down. In total, the Swiss Re cat Bond Price Return Index is down 15.82% between September 1 and September 8.

The pricing effect on Entropics portfolio is less and is expected to be less than 12% for the SEK nominated share classes.

Depending on the exact path of Irma, the prices are expected to recover fairly soon once the hurricane has passed. Current modelling indicate that a limited number of cat bonds are at risk with the current path, but, again, small differences in the path can cause widely diverging outcomes.

Impact in Irma’s tracks

As we have noted in previous updates, Irma has caused extensive damages, but it is too soon to know the full extent of the event. Wind, flooding and precipitation have caused not only damages to buildings, but large power outages and crop losses. Again, it can be noted that comprehensive plans and building codes in many areas have prevented a much larger catastrophe in terms of lives and property.

So far, 21 people have been reported dead in the Caribbean, but the number is expected to rise.

Longer term impacts will be discussed in Monte Carlo

The hurricane season of 2017, with notably the major ones Harvey and Irma so far, will certainly be the main topic during the yearly Monte Carlo reinsurance conference (9-14 September). The conference, being the main gathering of the reinsurance industry since 1957, is the first informal session concerning the renewals of reinsurance protections for 2018. In later years, the cat bond alternative has attracted more and more attention to both insurance and reinsurance companies, to transfer risk from their balance sheet without counterpart risk via the financial markets.

Further updates

Entropics continues to monitor the situation, including loss modelling, and will return with further updates after landfall.

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