Hurricane Sandy Estimates Increasing

8 November, 2012

The October issue of ALM News was written prior to Hurricane Sandy, with the exception of the following text in brackets which appeared on page 5: "(NB. As we go to press, Hurricane Sandy has been battering the North-East of the USA, but initial impressions are that the impact on Lloyd’s profits may not be huge, perhaps between 2% and 3% of capacity.)"

But the above initial impression was based on indications from various sources at that time that the insured loss might be in the region of $5bn to $10bn. Using the upper end of that range, together with a rough rule of thumb that Lloyd’s net loss from major US catastrophes tends to be around 10% of the total insured loss (although in reality it probably only gets to 10% rather above the $10bn level, as more reinsurance policies come into play), Lloyd’s share might have been $1bn. At an exchange rate of $1.60:£1, and assuming £24.2bn Lloyd’s 2012 capacity, this would have equated to 2.6% of capacity.

However, in the week or so since we went to press, most new estimates of the insured loss have been climbing closer to the $20bn level. The ALM would guess that Lloyd’s share of this would be in the region of 10% (see above), so that the impact upon Lloyd’s 2012 account profits could be in the region of 5% of capacity, rather than the 2% to 3% indicated in ALM News. That said, it is still too early to have confidence in any estimate. Lloyd’s is asking its managing agents to submit returns on this to Lloyd’s by 12th December. We hope to receive an overall Lloyd’s estimate once Lloyd’s has had the opportunity to review these returns.

Potential Impact on Premium Rates

The ALM makes no apology for coming up with the above guesswork at such a very early stage, as Names urgently need some idea of what the impact may be on premium rates for 2013, as they consider what to do in the fourth auction next week, which of the new syndicates they may wish to join, and whether to adjust their capacity on their catastrophe reinsurance special purpose syndicates (SPSs) for 2013.

It is unlikely that a 5% of capacity hit from Hurricane Sandy would make a huge difference to premium rates for 2013, especially as the insurance industry is generally so well capitalised at present. But it may help reinsurers to resist attempts by brokers to reduce catastrophe reinsurance rates in the USA, and may even allow some increases in rates for exposures in the North-East. This may happen if, as seems likely, Hurricane Sandy increases the demand for reinsurance by focussing attention on what huge losses might have occurred if Sandy had not reduced in strength to just below hurricane status immediately before it made landfall.

In addition, for the same reason, demand for primary insurance in the North-East may increase, which in turn could accelerate the gradual upturn in USA primary rates, at least in the North-East.

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