David Flandro, Global Head of Business Intelligence
The April 1, 2011 renewal once again demonstrated the reinsurance industry’s ability to operate during trying times. The renewal, which is dominated by business in the Asia-Pacific region, followed just a few weeks after the devastating 9.0Mw Tohoku earthquake struck off Japan on March 11. The earthquake and subsequent tsunami caused a humanitarian disaster, and the widespread damage to property and infrastructure is likely to make the event the most expensive insured loss outside of the United States, in history. Current modeled estimates predict an insured loss of between USD12 billion and USD30 billion for the event. This, along with other catastrophic events in Australia and New Zealand, resulted in a very challenging first quarter for the industry.
The loss in Japan, combined with flooding in Australia, Cyclone Yasi, a 6.3Mw earthquake in New Zealand and political unrest in North Africa and the Middle East, meant reinsurers experienced the most costly first quarter on record. It remains too early to assess what impact these losses will have on dedicated reinsurance sector capital for the full year 2011. However, it is important to remember that the reinsurance market was well capitalized at the January 1, 2011 renewal. Guy Carpenter’s Global Business Intelligence Team estimated dedicated reinsurance sector capital was USD19 billion above trend, given risks assumed.
Taken in isolation, the effect of the Tohoku earthquake and tsunami would therefore have been unlikely to significantly impair the sector’s excess capital position. However, the cost of the earthquake and tsunami comes on top of an estimated USD15 billion to USD20 billion in insured losses incurred in the first quarter prior to the earthquake. Consequently, many reinsurers’ 2011 natural catastrophe budgets have already been exhausted and a portion of the sector’s excess capital has been absorbed. Clearly, any additional large losses incurred in 2011 will put additional strain on reinsurers’ capital. Nevertheless, the industry is well positioned to deal with such a scenario. Guy Carpenter’s Global Business Intelligence Team estimates total dedicated reinsurance sector capital currently stands at between USD160 billion and USD180 billion.
The implications for the June and July reinsurance renewals later this year are unknown at this time. In the short term, we, at the very least, would expect to see increased demand for reinsurance cover. At the same time, share repurchases are likely to be scaled back or suspended until a clearer picture emerges.
At the April 1 renewal, the U.S. property catastrophe market showed signs of being in transition, with renewal pricing roughly flat. Timing of these events in the marketplace helped create a status quo renewal environment, with reinsurers generally renewing at expiring terms.
The heavy catastrophe losses incurred over the past twelve months in the Australia and New Zealand region led to some rate increases for loss-affected programs, although the introduction of annual aggregate deductibles and higher retentions offset part of the rise.
Korea witnessed rate increases in excess of 15 percent for many large property per event programs. In contrast, the majority of per risk treaties continued to secure rate reductions, with renewals in the range of flat to down 5 percent.