COMMENT: Japan, one week on

COMMENT: Japan, one week on

In any other week, the release of the results of the fifth quantitative impact study by Eiopa ahead of Solvency II – something that has been keenly anticipated for months – would have dominated the news agenda. But the devastating events in Japan have made all that is going on in Europe seem a mere trifle.

The terrifying magnitude 9.0 earthquake and tsunami off the coast of Honshu last Friday has left utter devastation. A week on, the official death toll is more than 6,500. More than 10,000 are still missing, and about 850,000 households in the north of the country are still without power.

The guessing game for the insurance industry has begun. AIR Worldwide was the first risk modeller to try to put a price on the event for insurers, saying on Sunday that property losses would be between $15bn and $35bn. AIR rival Eqecat yesterday estimated that the cost to the insurance industry would be between $12bn and $25bn.

All the uncertainty is making investors nervous. The share prices of Swiss Re and Munich Re – the global firms likely to take the biggest hit – fell about 10% in the three days after the quake.

In the past week, the earthquake’s effect on market capitalisation of US and Bermuda-based insurers and reinsurers has varied. Most have suffered fairly low falls of between 0% and 10%, but Platinum Underwriters fell 10.4%, Montpelier Re (which was hit disproportionally hard by Hurricane Katrina in 2005) fell 13.1%, while class of 2005 reinsurer Flagstone Re fell a whopping 23.7%.

Expect this uncertainty to continue for a while yet. Keefe, Bruyette & Woods analysts said today: “We expect that over the next several weeks, there will still be great fluctuation in the stocks as company-specific loss estimate ranges are disclosed and a tighter range is established of industry loss estimates.”

The analysts added that it is a great time for investors to take advantage of the dips to buy quality companies such as Ace, Arch Capital, Allied World and PartnerRe.

As the wide range of the estimates from AIR and Eqecat show, it is way too early to be able to say with certainty what effect this event will have on the market. That has not stopped people giving it a go, though. Equity analysts and rating agencies appear split on whether the event will be enough to force a turn in global insurance and reinsurance pricing.

For example, the Keefe, Bruyette & Woods analysts commented: “We continue to believe that rates in the property-catastrophe markers will be on the rise globally, albeit likely in the 0%-3% range in the US.”

If I had to guess, I would say that the event will obviously greatly harden rates in Japan but I am sceptical about rates going up elsewhere. Here’s why: Japanese domestic insurers are going to take the vast majority of the hit from this event n(they have a 94% share of the country’s non-life market), then the state-backed reinsurance fund (Eqecat reckons $2bn to $4bn of losses will be taken by Japanese Earthquake Reinsurance Company) for residential exposures and global reinsurers for commercial exposures.

Yes, global reinsurers are going to be hit hard by this event, as well as by January’s floods in Australia and February’s earthquake in New Zealand. All told, it will probably be the most expensive first quarter for cat losses ever. But reinsurers are still sitting on a lot of capital. According to Aon Benfield, global reinsurance capacity went up 17% between the end of 2009 and the end of the third quarter of 2010 – going up to $470bn from $402bn. That’s an increase of $68bn of capacity – more than reinsurers will lose from this quarter’s catastrophes.

A reinsurer would have a hard time trying to convince a US buyer why an event in Japan means they should pay more. Reinsurers’ ability to talk about rate increases has always been much better than their ability to get them.

It is, however, likely that the price cuts of 0% to 10% dished out to US cat buyers at the January 1 renewals will be halted. And don’t expect to see too many share buybacks for a while either.

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