David Flandro, Global Head of Business Intelligence
Now that we are more than a month on from the Great Tohoku Earthquake, the (re)insurance industry can take advantage of hindsight to understand the implications of this tragedy and take steps to improve capital management for the future, in order to better protect cedents and original insureds. Of course, the situation remains fluid. New information continues to become available, and that will have a salient impact on the actions that (re)insurers take as a result of the catastrophe. Yet, there is some early information that carriers can use to manage their capital.
As we all know, the earthquake itself measured 9.0 on the moment magnitude scale and triggered an extremely destructive tsunami with waves of up to 38 feet. The earthquake is estimated to have been the most powerful ever to hit Japan, and it is one of the five most powerful earthquakes recorded since 1900. Depending on ultimate estimates, it may become the most expensive insured earthquake loss in history (when adjusted for inflation).
The catastrophe modeling agencies have released initial insured loss estimates. EQECAT’s March 16, 2011 estimate was a range of USD12 billion to USD25 billion, including shake, ensuing tsunami, fire, marine, life and personal accident. AIR provided a range of USD20 billion to USD30 billion on March 25, 2011, including shake, fire and tsunami. And RMS, on April 11, 2011, estimated an insured loss range of USD18 billion to USD26 billion, including shake, fire, tsunami, marine, aviation and auto.
So far, reported reinsured loss estimates from the earthquake have reached approximately USD7 billion. This figure will likely rise to more than USD10 billion as we move through the first quarter reporting period in the coming weeks.
The losses in Japan follow those from the Australian Floods, Cyclone Yasi and the New Zealand Christchurch earthquake, which together amounted to at least another USD10 billion in reinsured losses, generating a combined reinsured catastrophe loss of upwards of USD20 billion in the first quarter.
This is possibly the worst first quarter in history.
Last year, the first quarter was also quite active, with approximately USD10 billion in reinsured losses, including the Chile earthquake, Windstorm Xynthia and, shortly thereafter in April, the Deepwater Horizon event. For the entirety of 2010, reinsurers reported net catastrophe losses of about USD30 billion and produced a calendar-year combined ratio of 96 percent - which included some accident-year reserve redundancy. This resulted in capital accretion to the reinsurance sector, and as a result, Guy Carpenter’s estimate of the sector’s excess capital position moved above USD20 billion by the end of the year. Consequently, rates on line decreased, in like-for-like terms, by a median rate of 7.5 percent for global property-catastrophe reinsurance cover at the January 1, 2011 reinsurance renewal.
With USD20 billion of excess capital at the beginning of the year, it was apparent that reinsurers could sustain further losses before the industry moved into a negative position - and certainly before we would see the kind of capital impairment that could instigate sharp rate increases.
So how does the sector’s current position compare to longer-term historical experience?
It is instructive to compare this situation to 2005, when the global reinsurance industry had a depleted capital position and was still filling holes in older accident year reserve positions. That year, the industry suffered reinsured catastrophe losses in excess of USD40 billion (in inflation-adjusted terms), primarily from Hurricanes Katrina, Rita and Wilma. The result of this was clear. Rates increased significantly in catastrophe lines, and USD30 billion of new capital entered the market post-event.
Today, global catastrophe excess of loss market annual premiums were exhausted at the end of the first quarter. While it is the nature of catastrophe business to incur losses from time to time, this could cause reinsurers to take more conservative positions and resist further catastrophe rate decreases, particularly in peak zones. Reinsurers may also press for corrections in territories that experienced losses recently. Nonetheless, the (re)insurance market is still some way away from the 2005 conditions that contributed to a wholesale market shift.
In the near-term, reinsurance underwriters will take into account everything they have learned from the events of the last eight months, and they certainly will consider the impact of these events on earnings. However, reinsurers, intermediaries and their clients will also need to manage rate expectations within the context of the long-term relationships they have sought to cultivate, in some cases over a wide range of market conditions.
This week, Guy Carpenter is running a series of articles about the state of the reinsurance market in Japan that can be used to help you manage your capital effectively. To have these articles delivered directly to your inbox every day, click here to register for our GC Capital Ideas alerts.