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Hard Market on the Horizon

Disaster fatigue is an understatement for how insurers, first responders and relief agencies such as the U.S. Federal Emergency Management Agency must be feeling about 2017. Communities around the world are reeling from the record loss of life, property and livelihoods following this annus horribilis, which, just in the United States, has seen apocalyptic wildfires in California, record-flooding in Houston, and wide-scale devastation across the Caribbean and Florida Peninsula, courtesy of Hurricanes Harvey, Irma and Maria. These events, along with the devastating earthquake in Mexico City, have conspired to make 2017 what will no doubt prove to be the costliest on record for natural disasters for insurers, as well as for many of the inhabitants of the impacted locations.

These events may surpass the $500 billion mark in terms of economic costs and insured losses, making 2017 the worst year on record. Indeed, some insurers have already declared it their costliest year. Combine the clash of these man-made and natural catastrophe losses with other complex risks, which are beginning to affect the insurance industry’s collective balance sheet—such as cyber or political risk—and it is reasonable to expect a substantial hardening of rates and terms into 2018 and beyond.

The insurance industry oscillates between “hard” and “soft” markets as a function of market penetration, loss ratios across distinct categories of coverage, as well as interest rate and macroeconomic factors. With the top 10 insurers themselves sitting astride more than $7 trillion in assets under management, the global insurance industry is at once too big to fail and too big to hide, requiring new ways of allocating capital and pre-investing in resilience.

As an example, the Equifax cybersecurity breach is expected to cost international insurance markets as much as $150 million. When combined with the under-penetration of cyber insurance across comparatively safer industry segments and in the middle-market, the Equifax breach may itself result in more circumspect (read pricier) insurance terms moving into 2018.

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