Two of the big stories in 2016 were Hurricane Matthew and the rapidly increasing interest in InsurTech. Nick Martin looks back at how close the insurance industry came to the worst loss in its history and how InsurTech may be more of an opportunity than some people fear.
Nick Martin is the Manager of the Polar Capital Global Insurance Fund which currently invests in excess of USD 750m in insurance equities.
Hurricane Matthew made landfall on 8 October and, based on estimates provided by the third-party catastrophe modelling companies, is expected to result in an insured industry loss of $3-8 billion. The range reflects the fact that it remains early days and estimates are inherently uncertain. At this level Hurricane Matthew would be a fourth-quarter earnings event and not sufficiently large to cause an uptick in catastrophe pricing.
Validus made some interesting observations on its third-quarter earnings call about the event. Matthew was unusual in that it followed the US coastline for hundreds of miles before making landfall in South Carolina. Validus' research team estimated that had Matthew tracked just 30 miles to the west, then the winds would not have been degraded by landfall and Matthew would have generated an industry loss of $38 billion due to the concentration of exposure in Florida.
Another scenario where a similar storm to Matthew hit Florida (but well north of Miami) would have cost $78 billion. Whilst some commentators dismiss Matthew as a non-event, Validus rightly noted that the industry just missed the most expensive storm in history.
Under these scenarios Matthew would have had a sizeable impact on catastrophe pricing and would have likely caused significant losses for financial markets capital providers of catastrophe risk (e.g. cat bond investors). The Matthew loss adds further conviction to the argument that catastrophe reinsurance pricing now has largely bottomed.
Now we are out of US hurricane season, investors' attention will again turn to capital management. As has been the case since the financial crisis, the US insurance sector has continued to return most of its earnings to investors through dividends and share buybacks. This capital discipline continues to result in a stable underwriting market where well-run insurers are able to generate more than acceptable returns for shareholders in what remains a very low-growth and challenged environment. With US insurance company industry valuations still remaining at a discount to historical averages, I believe the earnings power of many companies in the US industry continues to be overlooked.
One topic that is increasingly being discussed on company earnings calls is technology and innovation. These are indeed exciting times for the insurance industry with InsurTech being potentially disruptive but also providing great opportunities for incumbents.
My own view is the InsurTech debate all too often centres around the premise that the shiny new start-ups will win at the expense of the tired old incumbents. I believe that will not be the case. The most progress will likely be made by partnerships between innovative nimble start-ups and incumbents who are skilled at navigating a highly regulated and complicated ecosystem.
Technology used well can change the current customer proposition. The traditional insurance industry model has the opportunity to move from one of post loss reactive reimbursement to one of proactively managing down customers' risks. The latter model is significantly more valuable to the customer and can change insurance from the grudge purchase that many view it as today.
Incumbents working with InsurTech start-ups can accelerate this evolution. Through reduced costs and better efficiency, technology can be an enabler to make what was previously uninsurable, now insurable. Emerging new markets, like microinsurance, expand the overall industry pie not only to the benefit of all market participants but more importantly to society at large. InsurTech is not a zero sum game.
More information on the Polar Capital Global Insurance Fund and other Polar Capital Funds can be found at www.polarcapital.co.uk
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Posted: Monday, December 12th, 2016