October 3rd, 2012

Catastrophe Activity: Increasing Cold Spots

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President
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In addition to the challenging macroeconomic environment, the sector has had to contend with heavy catastrophe losses over the last few years, particularly in areas not previously considered peak risks. Since 2010, (re)insurers have been hit by powerful earthquakes in Chile and New Zealand and devastating floods in Thailand and Australia. The result has been unexpectedly expensive “cold spot” losses at a time of increased insurance demand in regions such as emerging Asia and Latin America. Furthermore, the lack of catastrophe modeling solutions in emerging markets has raised concerns that (re)insurers do not currently possess an adequate understanding of the scale and nature of losses that can occur in these territories. In contrast to 2011, global catastrophe activity has been relatively light so far in 2012.

Increasing Cold Spot Losses

The recent rise of insured losses in non-peak zones is evident when looking at the global insured loss distribution over the last three years. FigureĀ 1 shows that 35 percent of insured natural catastrophe losses between 2009 and 2011 were located in Asia while only 33 percent were in the United States. Australia and New Zealand also saw a marked increase in natural catastrophe insured losses during this period, with 19 percent of the total. This is in stark contrast to the long-term trend of more than three-quarters of all insured natural catastrophe losses occurring in the United States.

Figure 1

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In 2011 alone, two of the most damaging earthquakes in recent times struck Japan and New Zealand early in the year. Other significant catastrophes in 2011, including devastating floods in Thailand and Australia and a record-breaking tornado season in the United States, combined to cause insured losses in excess of USD110 billion. Of all these large losses, only the Tohoku earthquake in Japan can truly be considered a peak risk. Yet the non-peak catastrophes of 2011 also drove the direction of the (re)insurance sector, culminating in a 9.5 percent average increase in global property catastrophe rates at January 1, 2012, according to the Guy Carpenter Global Property Catastrophe Rate on Line Index.

This growing trend of heavy losses in non-peak markets is expected to have a significant impact on property catastrophe lines of business, particularly as many of these territories are unmodeled or inadequately modeled. Indeed, the recent spate of expensive cold spot losses has highlighted the limits of carriers’ understanding of natural catastrophes in non-peak zones and the difficulty of adequately pricing business and monitoring exposure growth without the appropriate tools for modeling risk. As (re)insurers increasingly look towards emerging countries for top-line growth, understanding the risks in these non-peak zones and carefully monitoring exposure growth as insurance demand rises in these territories is one of the biggest challenges companies face.

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