Australia and New Zealand Property
The 2010-2011 year has proven to be a significant one for the Australian/New Zealand insurance industry as a result of the natural catastrophe activity that impacted the market over the past twelve months.
In Australia, the most significant event has been the flooding that predominantly affected Queensland. Separate events in December 2010 and January 2011 resulted in both insured and economic loss on a large scale. These events have once again led to considerable debate regarding flood as a peril, with coverage definitions varying greatly between insurers. In light of these disasters, the Australian Assistant Treasurer in early March of 2011 began a Natural Disaster Insurance Review, which issued its initial thoughts for further comment in early June. Its early findings suggested two alternative strategies for handling flood – automatic cover or an opt-out position.
In New Zealand, the city of Christchurch suffered a devastating 7.1 Mw earthquake in September 2010 that resulted in insured losses of approximately USD4 billion. An aftershock measuring 6.3 Mw struck in February 2011, with an epi-center that was much closer to the city. Damage sustained was much greater. With close to 200 fatalities, this second earthquake also caused significantly more building damage, and early estimates put the insured loss as high as USD12 billion. Further aftershocks and earthquakes have continued to impact the Christchurch area. Discussion is ongoing between the insurance industry, government and EQC in New Zealand regarding the role insurance (and reinsurance) will play in the reconstruction of Christchurch and its surrounding area.
As a major reinsurance renewal date for the Australian/New Zealand market, July 1 was the first real test of how these various natural catastrophe events of the past 18 months have impacted reinsurer pricing and capacity for catastrophe excess of loss programs. Final outcomes of these events remain unknown. Prior to the renewal, reinsurers signaled that rates would need to increase and this proved to be true. Pricing was adjusted upwards to account for exposure growth in addition to a further general increase in pricing, as reinsurers looked to achieve a higher return for the capacity being deployed. Where programs were impacted by the loss activity, additional increases were imposed. While capacity has remained adequate, reinsurers’ approach to the renewal was largely uniform. Catastrophe program rates increased in a range from 20 percent to greater than 100 percent. While reinstatement provisions were expected to come under pressure, most reinsurers continued to offer and support these on a pre-paid basis.
The impact of these natural catastrophe events also had an impact on the proportional and per risk reinsurance markets. Reinsurers sought to further limit the amount of catastrophe cover given under these treaties, with commission terms being amended to reflect treaty experience over the past 18 months.
Latin America and Caribbean Property
Property catastrophe rates in the region were stable, with a tendency to increase between 5 percent and 10 percent in the wind-exposed regions. Reinsurers’ views on the extent of the increase are quite divergent. The divergence is often related to each reinsurer’s own first half 2011 catastrophe losses and what each believes the Latin America and Caribbean contribution should be to the recovery of the loss.
The market was slightly more varied than in previous renewals, with some markets looking to grow in the region while others tightened their underwriting criteria. Rates on Chilean catastrophe programs were flat, following the significant increases of last year. Property proportional treaties in the region experienced the same terms and conditions as last year. The ability of buyers to receive any kind of risk adjusted price decrease was virtually gone.
Capacity is readily available for property business from existing players and new entrants. However, we saw some pricing resistance on the upper layers of big catastrophe programs, where the key players looked for a better return on their capital in earthquake exposed territories.
Pressure on reinsurers’ proportional capacity continues to grow. Several reinsurers reduced their proportional capacity, as the impact on their own numbers from unlimited sideways coverage of pro rata continued to cause issues. Reinsurers are increasing the scrutiny of their own aggregates and how the aggregates grow. Pro rata is an area that tends to stress reinsurers’ accumulations.
Original property rates were still competitive, as some multinational insurers, many untouched by losses in the Pacific Rim, look to maximize their opportunities arising from the growth in Latin American economies. This is in direct contrast to the trends in reinsurance property rates.
The new regulatory environment in Argentina and Brazil, which proposes to enhance cessions to local reinsurers, has dominated reinsurers’ strategic thinking recently. Ultimately, this is likely to accelerate the development of two hubs for the region: Brazil in the Southern Cone and Miami for the rest of the players in the region.
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Australia and New Zealand Property