Another costly year of natural catastrophes could reduce the desire of some capital markets investors to take on insurance and reinsurance risk, according to a key QBE Re executive.

The global insurance industry suffered $138 billion of claims from natural catastrophes in 2017. Though the first half of 2018 was relatively quiet, a series of powerful storms struck in September, including Hurricane Florence in the U.S., typhoons Jebi and Trami in Japan and Typhoon Mangkhut in the Philippines.

While the storms may not be enough to have a large impact on the global reinsurance market individually, aggregate cover, which insurers and reinsurers buy to limit the effects of a series of disasters, could be triggered. QBE Re Chief Underwriting Officer Jonathan Parry told S&P Global Market Intelligence in an interview that a lot of aggregate cover is provided by the capital markets, often referred to as alternative capital.

"Those aggregate covers got hit very hard in 2017," he said. "If they get hit again in 2018, I think there will be a reduction in appetite."

Alternative capital reloaded quickly after the 2017 catastrophes and had proved "very robust," Parry said, but that may change this time around.

"If you get a bloody nose two years on the trot, I think that might put some people off," he said.

Alternative capital sources have had a dampening effect on pricing for catastrophe reinsurance because they have added to the capacity supply. Investors' speedy return to the market after the 2017 losses is part of the reason why reinsurance capacity did not dwindle, which typically happens after heavy claims, and price increases were lower than the industry expected.

Renewal 'battle'

Parry spoke to S&P Global Market Intelligence as European insurers and reinsurers prepare to gather in the German spa town of Baden-Baden for negotiations ahead of the Jan. 1, 2019, renewals. He predicted that one source of tension between reinsurers and buyers would be a change to risk modeling firm RMS' catastrophe model, which shows a reduced expectation of loss from U.S. windstorm events and which Parry said buyers may use to try to argue for lower reinsurance prices.

"We don't see it as a reduction in exposure. We see it as a reduction in anticipated loss from a cat modeling agency," he said. "We have our own view of risk and our own separate opinion, but I think that is going to be part of the battle, especially for the Jan. 1 renewal."

Parry also said that recent large mergers in the insurance and reinsurance industry could lead to higher reinsurance rates. A natural assumption when large insurance companies merge is that the combined entity will buy less reinsurance, but Parry said some merged entities had reduced appetite to retain risk.

"They will potentially be buying more reinsurance to protect their bottom line, which would increase demand [and] would help the pricing side," he said.