October 30, 2012: At the time we were publishing our 2011 Asia Pacific Catastrophe report, there was a growing realization that losses from the Thai flooding ongoing at the time were going to be significant. The Thai flood losses came at the end of a run of losses in the Asia Pacific region that were large, unprecedented in recent times and possibly unexpected by many market participants.
Catastrophe treaty business in Asia Pacific produced a loss ratio of over 900 percent for 2011. Most reinsurers, however, are diversified across geography and results outside our region were generally good. Globally the loss ratio for catastrophe treaty writers in 2011 was closer to 200 percent. Compare this with the situation in 2005, where the global number was much worse, at 300 percent. Furthermore, reinsurers are diversified across product line and overall were able to shrug off the loss effects of 2011 and still grow capital in the aggregate for the year, albeit by a small amount.
In 2012, a benign catastrophe year and increased rates around the world have enabled reinsurers to start to recoup the losses of 2010/11 and overall Guy Carpenter’s Global Reinsurance Composite grew its aggregate capital position by USD10 billion during the first half of 2012. We estimate that reinsurers’ two year loss ratio for global catastrophe treaty is around breakeven, despite some loss creep on 2011 year losses.
Asia Pacific Reinsurance Market Conditions
The reinsurance market’s response to the losses of 2010/11 was generally rational. Despite the increase in catastrophe limit being purchased throughout the Asia Pacific region as a whole, capacity remained available in all zones, though subject to price change and sometimes with restrictions in conditions or coverage scope.
By 2012, some programs in Japan and Australia were in their second renewal following the losses; and in these cases, and in the absence of any loss reserve deterioration, price movements were not too severe, though all programs were subject to the general hardening of the global catastrophe market. Coupled with the increase in catastrophe limits being purchased, this led to an increase in the overall premium pool for Asia Pacific catastrophe risk.
Securing cover is, of course, only half of the story. Reinsurance is a promise to pay with contracts structured on the ancient principle of “uberrima fides” (utmost good faith) and underpinned by the concept of “follow-the-fortunes” inherent in any reinsurance relationship. The financial value of reinsurance contracts is significant both for buyer and seller and it is therefore imperative that insurance companies ensure that contract wordings are constructed in a professional manner to ensure clarity of coverage. It is also imperative that the trading relationship is based on mutual trust. Inevitably, we will encounter unforeseen circumstances, for example, settlement of claims in the “Red Zone” in New Zealand, and how insurance and reinsurance partners navigate these challenges is important.
Collection of valid claims in a prompt and timely manner is critical to the integrity of our business. Guy Carpenter has dedicated significant time and energy to ensuring that claims are paid promptly. It is only when the promise to pay is delivered that the value of the contract and relationship can be determined. Therefore willingness to pay is a critical component in a reinsurance transaction and that concept has never been tested more than now.
The rational response of the market to poor experience was good news for hard pressed cedents with renewals during 2012. However, it is recognized by all participants in the market that there is a need for a much greater understanding of the perils and risks faced throughout the region. Windstorm and earthquake risks are generally modeled by vendor modelling companies, at least in the major territories. But the events of 2010/11 highlighted the gaps and limitations that exist in the currently available models as well as the need for new models to cater for perils such as flood.
As we highlighted in our report in 2011, the Asia Pacific region is an area of significant economic growth where insurance penetration is increasing. One aspect of this growth has been the expansion of major industrial parks throughout the region. The Thai floods emphasized the need not only to understand asset concentrations better but also the fragility of global supply chains. Not only were these property damage losses modeled on a rudimentary basis if at all, but business interruption losses and supply chain disruption were completely unmodeled.
When we look forward we believe that the Asia Pacific region continues to represent an attractive opportunity both in terms of geography and product mix. In the pages that follow we review the condition of each major catastrophe prone market in our region, helping set the stage for the 2013 renewal season.
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