A deadly outbreak of a swine flu virus first detected in Mexico has sparked global concern, as a rising number of cases have been detected worldwide. The World Health Organization (WHO) yesterday raised its flu pandemic alert level from three to four, two steps short of declaring a full pandemic. The WHO said the upgrade signalled a “significant increase in risk of a pandemic,” and prompted the organization to advise countries to now focus on mitigating the effects of the virus rather than containing it. The WHO’s level four alert means the virus is showing a sustained ability to pass from human to human, and is able to cause community-level outbreaks. However, the organization stressed that “a pandemic is not considered inevitable” at this stage.

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Financial Intelligence Team
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Prior to the recent turbulence in the financial markets, insurers and reinsurers were increasing their use of enterprise risk management (ERM) to make risk and capital management decisions. While this was driven in part by rating agencies and regulators, many carriers began to recognize the value of metric-based frameworks and capital models in evaluating their portfolios.

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Ed Fenton, Managing Director
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Japanese Interests Abroad Excess of Loss

Over the long term, companies are likely to continue to buy combined domestic and overseas programs in order to build their risk capacity. In fact, there are few standalone Japan Interests Abroad (JIA) treaties on which to build a view of market trends. In a tightening market, reinsurers are always sensitive to worldwide exposures within treaties, and there was evidence of this factor affecting the marketing of some treaties, especially if there were large increases in the proportion of overseas exposures. It was a better year than previous in terms of loss activity, and the renewal was successfully completed with few changes in structure.

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Given its catastrophe characteristics, the pricing of Japanese PA programs is mainly based on earthquake scenarios. Therefore, price developments are correlated with the movement of earthquake aggregates. Rates remained mainly stable, ranging from -5 percent to 5 percent.

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Ed Fenton, Managing Director
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Pro Rata Fire

A change from the past few years, the Japanese fire market enjoyed a relatively straightforward renewal at April 1, 2009. During the 2008 renewal process, insurers indicated that they would undertake various measures to improve the original business that forms the subject matter of these treaties. This year, it was desirable for each buyer to provide some kind of statement or presentation to update the market as to their progress against the goals that had been outlined at last renewal. All the major players produced such a statement and these were generally well received by reinsurers.

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Ed Fenton, Managing Director
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Earthquake Pro Rata

Capacity Purchased, Pricing, and Aggregate Movements

Probable maximum loss (PML) ceded by the market declined only slightly for the second year in a row at the April 1, 2009 reinsurance renewal in Japan. Some treaty restructuring caused capacity to increase modestly, resulting in the growth in “air” capacity (i.e., the difference between theoretical available capacity and actual capacity ceded). Rate on line (ROL) grew by approximately 2.5 percent. Commissions were unchanged.

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Probable maximum loss (PML) ceded by the market declined only slightly for the second year in a row. Some treaty restructuring caused capacity to increase modestly, resulting in the growth in “air” capacity (i.e., the difference between theoretical available capacity and actual capacity ceded). Rate on line (ROL) grew by approximately 2.5 percent. Commissions were unchanged.

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Capacity purchased by non-life companies grew noticeably, driven by an increase in the amount of combined cover purchased and a reduction in existing placements’ co-reinsurance shares.

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The standalone earthquake fire expense insurance (EFEI) market shrunk for the sixth year in a row. More coverage was incorporated into other covers, including earthquake/EFEI combined placements and programs with combined windstorm and earthquake lines coverage.

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The largest aggregate exposure in Japan is now found in Zone 6, with the traditional peak (Zone 5) not far behind. Growth continues to be experienced in other zones, particularly Zone 8 and Zone 11.

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