Reinsurance CUOs are scrutinizing their 2025 large-loss budgets closely this week, as Hurricane Melissa ravages Jamaica, Cuba, and other Caribbean islands. They are unlikely to be panicked, though.
The market reached mid-October with only a single mega-loss on the books: January’s Eaton and Palisades fires in southern California scorched many reinsurers’ P&L accounts. The cost of those events has yet to settle, but wildfires in the state that month caused perhaps $100 billion worth of economic damages, including hard-to-insure intangibles like lost output and loss of attraction. Insurance will cover an estimated 40% of that, delivering an unpleasant but manageable $40 billion market loss.
Few international reinsurers escaped the claims. To cite the largest, Munich Re reported that major losses in the first half of the year were below their internal expectations, consuming about 58% of the half-year budget and c. 14% of full-year allowances. Swiss Re spent about 72% of its H1 nat cat budget, and Hannover Re’s H1 cat losses were slightly above internal expectations, at 45% of the year’s budget, all according to the companies’ own reports.
Aside from a series of costly Severe Convective Storms, the balance of H1 proved relatively benign for large catastrophes. So did Q3, which includes the first months of a hurricane season predicted by many to feature an above-average number of storms. Many formed, but most stayed safely at sea.
After the fires, Swiss Re’s SIGMA research group had forecast total insured losses of $145 billion for 2025, compared to an actual of $137 billion in 2024. But later they revised their prediction, expecting the total would fall below $100 billion in the absence of landfalling hurricanes.
When hurricanes failed to form, CUOs became quietly optimistic about a low-loss year on the one hand, but – with the January fires now a fading memory – equally nervous that without another sizeable event to discourage some of the sector’s expanding capacity, 2026 renewal rates could plummet.
The Melissa factor
That was before hurricane Melissa began swirling towards Jamaica, an island laden with heavily insured international assets. Beginning this week, every catastrophe reinsurance underwriter worldwide will mention Melissa when attempting to defend offers of only minimal property cat rate reductions.
Some will reference Melissa when reminding brokers and cedants alike that even at the end of October, nothing is certain. In hurricane-hyperactive 2020, for example, two Category 4 storms – Eta and Iota – devastated the Caribbean in November. Underwriters may even recall 1999, when Lothar and Martin, a pair of ferocious windstorms, hit Europe over the Christmas break.
It is far too early to add up the actual cost of Hurricane Melissa, which has been devastating for the people and businesses of Jamaica, and tragically fatal for some. We can say, though, that the storm will not have a similar impact on the world’s reinsurers.
We’ve done some back-of-the-envelope calculations. Locally deployed catastrophe reinsurance capacity is about $1.5 billion, all in, including sovereign bonds totaling about $250 million and local general insurers’ cat programs with limit of about $1.2 billion. However, the larger limits don’t sit with local carriers or the state. They’re covering international property assets.
For hotels alone – which when internationally owned or franchised are almost always insured in Bermuda or London, and heavily reinsured for tropical storm – we estimate the total limit at around $13 billion. And while offshore energy assets in the Gulf are not presently threatened by Melissa, many others in Jamaica and Cuba are. These range from major retail facilities to energy generation plants, ports, and manufacturing facilities, all re/insured in or into international markets.
Even in aggregate, however, the foreseeable loss under the limits covering these assets is not sufficiently substantial to utterly upend most reinsurers’ catastrophe loss budgets. Most global reinsurance treaty portfolios are calibrated for average expected aggregate losses in the region of $150 billion per year. Amplifying this, the constrained supply of hurricane aggregate limit during the hard-market negotiations of 2024 means losses lower down programs will not be realized.
Some large-loss budgets are likely to be breached, of course. Such allowances are a product of each reinsurer’s view of risk, their expected ROE, and myriad other factors, and some will have been more optimistic than others. However, we can comfortably conclude that the international reinsurance sector’s exposure to Melissa, while costly, will not be a capital event for all but the most over-extended, or the very unlucky who suffer a concentration of losses from the January wildfires, SCS events and the current storm.
The impact should be similar in the catastrophe bond and ILS markets, where many investors will have exposures. Jamaica’s $150 million World Bank sovereign cat bond, which notoriously was not triggered by Hurricane Beryl last year, is almost certain to be exhausted, as will parametric coverage through the Caribbean Catastrophe Risk Insurance Facility which sits a layer below it. But we face a long wait for the calculations that trigger non-parametric layers of private reinsurance and retro based on industry losses. Melissa may take some of the luster off the ILS market, which has seen record-high returns and commensurately low pricing of late.
Melissa’s limited impact relative to large-loss budgets won’t stop underwriters mentioning the storm during renewal negotiations. The storm provides a powerful argument in favor of holding fast on policy conditions, which could restrain the much-hyped resurgence of aggregate limits at lower levels. Such protection is available, but although reinsurers’ surplus capital remains relatively intact at this point in the renewal season, and probably larger than at was in November 2024, we expect CUOs will now be slightly less inclined to put it dangerously at risk.
It’s never over until it’s over, of course, but even with the cost of Melissa and the impact of the California wildfires bookending the budget, natural catastrophe events so far this year look set to fall within reinsurers’ large-loss expectations. An aggregate loss that falls short of expectations and forecasts by a full $50 billion must be good for all stakeholders. Short of further landfall in the US which delivers a thundering blow, Melissa is likely to be only an earnings event for reinsurers with a properly diversified book – and that’s what they’re there for.
