October 25th, 2012

Global Losses of 2011 Changed the Perception of Risk

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President

Over the last few years, the global (re)insurance sector has seen significant increases in cold spot catastrophe losses. This growing trend refers to exposures in territories that have historically been considered non-peak zones and are unmodeled or inadequately modeled. It is also a by-product of the increasingly global economy in which (re)insurers operate and the growing demand for (re)insurance in emerging and developing territories. These developments are expected to have a significant impact on the property catastrophe market, driving the need for a deeper analysis of risk in non-peak catastrophe zones. Indeed, developing a better understanding of underwriting risks in these new markets and overcoming the current catastrophe model limitations are key ingredients to future success.

Catastrophe events that have had a meaningful impact on the (re)insurance sector have traditionally been located in peak zones, particularly the United States. However, the (re)insurance sector was hit by a cluster of costly global losses in 2011. Two of the most damaging earthquakes in recent times struck Japan and New Zealand early in the year. Several other events, including devastating floods in Thailand and Australia, a record-breaking tornado season in the United States and Hurricane Irene making landfall along the U.S. East Coast, combined to cause insured losses in excess of USD110 billion. Losses in 2011 were second only to 2005, when (re)insurers paid out more than USD120 billion (inflation adjusted).

Asia, Australia and New Zealand accounted for more than two-thirds of total insured losses in 2011. This was in spite of the fact that these regions account for only approximately 20 percent of global insurance premiums. Moreover, some events in 2011 highlighted (re)insurers’ limited understanding around the loss potential of natural catastrophes in non-peak zones. There was also the added complication of the emergence of unmodeled and previously considered uncorrelated risks following the Tohoku earthquake in Japan and the floods in Thailand. These events raised concerns about unexpected loss exposures such as contingent business interruption (CBI) in global supply chains. They also emphasized the need to develop a better understanding of the interconnectivity and volatility of these risks.

Companies are therefore now looking cautiously at their portfolios and accumulated risks. Some have already responded by demanding higher rates while others have reduced capacity in the affected markets, reflecting uncertainty in their risk analysis and/or risk appetite. Despite these different approaches, (re)insurers are united in recognizing the increased likelihood of significant non-peak zone losses in the future and the need to improve methods of identifying and modeling exposures in emerging markets.

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