COMMENT: The hits keep coming for cat market

COMMENT: The hits keep coming for cat market

June is Reactions’ catastrophe-focused issue. Traditionally we have looked at what was to come in the year, with the issue timed to coincide with the start of the North Atlantic hurricane season and, with it, the bringing into play of the biggest threat of an instant loss to insurers’ and reinsurers’ balance sheets alongside California earthquake exposure.

In recent times, catastrophe activity in the year until then has been light, with maybe a medium-sized European storm the worst thrown at the industry. This has not been so in the past two years, however.

Last year, a magnitude earthquake struck Chile in February, triggering an estimated $8bn of insured losses. That turned out to be by far the biggest catastrophe loss of the year for the industry, followed by $2.9bn of losses from February’s Winter Storm Xynthia in Europe and $2.7bn of losses from an earthquake in New Zealand in September, according to Swiss Re figures. Willis said the $16bn of insured catastrophe losses in 2010’s first quarter was the most costly first quarter in history.

Until this year, that is. That figure has been dwarfed by the succession of increasingly severe losses in the first quarter. Not a month had gone by without a cat loss running into the billions of dollars.

Flooding in Australia that began in late December carried on into January. Insured loss estimates range between $4bn and $6bn for the floods. Australia was to suffer further: Cyclone Yasi struck on February 2, adding another $1.5bn of losses to insurers’ tab.

Australia’s woes were followed by another New Zealand earthquake in February, this one even more devastating than last year’s. Many insurers peg the industry loss at between $8bn and $12bn.

These terrible events were mere warm-ups for the March 11 Tohoku Earthquake in Japan. The magnitude 9.0 earthquake had not even been modelled because it was not deemed likely such a large quake would occur in the place it struck. Risk modellers estimate the insured losses from Japan at between $22bn and $39bn.

The Japanese earthquake obviously has serious ramifications for its domestic market, as well as international reinsurers, and the mess will take a long time to work through.
The event marks the peak of insured losses so far this year, and insurers and reinsurers will be hoping that is the way it stays for the rest of 2011.

However, the cat losses have not stopped coming. In April a series of deadly tornados tore through the US. Risk Management Solutions pegs the losses from these at between $3.5bn and $6bn, while an earlier Eqecat estimate placed losses at between $2bn and $5bn.

In May, more tornadoes struck. This time one deadly earthquake in Joplin, Missouri, killed more than 130 people and caused an estimated $1bn to $3bn loss by itself, according to Eqecat. AIR Worldwide places losses from all tornado losses in May at between $4bn and $7bn.

And poor New Zealand suffered further woe in June when a magnitude 6.0 earthquake occurred near Christchurch. Eqecat estimates insured losses of between $3bn and $5bn from the latest event, although a number of people in the market have rubbished this as too high.

All of which adds up to a serious hit to the global insurance and reinsurance industry, with the hurricane season only just begun. Even taking the low-end of the estimates for all the losses – a conservative approach, given the tendency for cat losses to get revised upwards as more information comes in – that is more than $40bn of insured losses.

And yet it is not clear how this will affect the market. Some say it will be enough to turn rates across the market; others say not. Often, the viewpoint given comes down to whether you are talking to a reinsurer or a broker.

Early feedback from June 1 renewals suggests that there is now enough momentum to force price increases globally for catastrophe business, at least. Some reinsurance firms have even put their money where their mouths are, and made investments to take advantage of expected price increases. Alterra, Lancashire and Validus have launched sidecar vehicles recently, while RenaissanceRe has raised $100m for its DaVinci Re joint venture.

However, rating agency Fitch recently cautioned: “Reinsurers appear optimistic about the potential for an improved pricing environment, at least for catastrophe-exposed lines, according to first-quarter earnings calls. However, Fitch believes that, outside of the areas directly affected by the first-quarter catastrophe events, rate improvement will be modest at best. Barring any additional large loss events, a return to an enduring hard market is unlikely as pricing improvement is suppressed by the reinsurance industry’s continued strong capitalisation.”

What is clear is that the market would be extremely challenged by a large hurricane loss this year. The strain from the year’s losses is already starting to show. Flagstone Re, for example, has its A- ratings on negative outlook from the rating agencies that rate it as a result of its cat losses. In June, Fitch downgraded PartnerRe to AA- as a result of its outsized cat losses. A big hurricane would seem certain to bring further rating actions for the industry, after a period of relative calm on the ratings front.

In addition, international players are dealing with one of the most challenging claims processes it could face. This was shown in March, when firms were put in the stressful situation of giving initial loss estimates from Japan – which represented nothing more than an educated guess from modelled outputs – while also providing more reliable updates of New Zealand and Australia losses, as actual claims started coming in.

The industry still remains fairly well capitalised, as brokers are always keen to point out. But, with an above-average hurricane season forecast (aren’t they always?), this could be wiped out in a matter of days. The losses so far this year have stayed the right side of being an earnings event for most insurers and reinsurers. It is clear that any other events will start eating into capital.

Who said talking about the weather was boring?

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