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https://www.wsj.com/finance/insurance-catastrophe-reinsurance-hurricane-77a69eab The industry needs to be talking about the plausibility of $200 billion nominal loss years, which might be more of a near-term possibility than we realize,” says Steve Bowen, chief science officer at brokerage Arthur J. Gallagher & Co.’s Gallagher Re. The net result, says catastrophe-modeling veteran Karen Clark, is that the industry is facing a turning point akin to Andrew’s wake. And she would know: Back in 1992, Clark faxed around an estimate for Andrew’s loss based on a computer model she had developed that was twice what other industry sources at the time were saying. Her number proved to be the right one. Insurers’ struggle today to price what she calls “frequency peril” risks like wildfires are “a déjà vu moment,” Clark says. “I never thought I would see a disrupted market like after Andrew. But here we are.” Part of the challenge has been insurers or their clients relying on models like those developed in the 1990s for hurricanes or earthquakes to understand other kinds of risks, including secondary perils like wildfires or “social” risks like litigation. There has also been a glut of capital in the insurance industry, which has helped depress risk pricing. Superlow interest rates led investors to seek out yield in strange places, like “cat” bonds and other insurance-linked securities that paid high rates but bore the risk of catastrophe losses. Reinsurers globally failed to earn back their cost of capital in five of the six years from 2017 to 2022, according to estimates by S&P Global Ratings. Now, things are changing. Rising interest rates are making it less attractive for investors to pour money into insurance risks when they can get higher yields on simpler things. That has given the upper hand to big reinsurers, which have pushed through big price increases this year. Reinsurers are also often changing the structures of their coverage by raising the so-called attachment points at which they will start to absorb losses, enabling them to focus on the more extreme, existential risks to insurers’ capital. Also aided by the prospect of higher interest rates on their investment portfolios, reinsurers such as Everest Group, RenaissanceRe, Munich Re and Swiss Re have seen their shares rally sharply in the past year. But with rising attachment points, primary insurers—firms like Allstate or Progressive, which sell policies to consumers or businesses and often buy reinsurance to cover their tail risks—can end up more exposed to these frequent-but-smaller catastrophes. One way they can compensate is to continue to raise the premiums they charge their customers. Another is to pull back from the trickiest markets, like when State Farm said it would stop writing new homeowners’ policies in California. Clark says insurers will need to adapt to newer kinds of models that help price risks like thunderstorms or wildfires. Her firm is updating its wildfire model as often as once a year. So whether a big one hits or not, this hurricane season is going to be an important measuring stick for insurers. A quiet season or two could actually make things more volatile for the industry if a sense of complacency sets in and pricing momentum slows. As the underwriting adage goes, there is no such thing as a bad risk; only a bad price.

20B @15% = 1T in 28 years.