It was with disbelief and then horror that the world watched the images broadcast across the globe of the Indian Ocean tsunami which struck on 26 December

Thirty feet high waves flattened whole towns, almost as if hell bent on wiping out all traces of habitation, and in some areas they succeeded. Recent reports have put the death toll at approximately 280,000, but with thousands of people still unaccounted for few are in any doubt that this figure still has a long way to rise.

While satellite images revealed devastation on an unprecedented scale, with most buildings reduced to their bare foundations, initial reports indicate that insurance cover was low. The term "low insurance penetration" has been applied to the majority of regions affected by the tsunami, with most market commentaries predicting a limited material impact on the re/insurance sector. A recent report by Risk Management Solutions has estimated that overall insured losses could be below $4bn. Of those reinsurers who have released loss predictions, Munich Re has put the figure at below $135.5m, Swiss Re at $87.6m, PartnerRe has estimated its exposure at between $25m - $35m, while XL has released preliminary estimates of approximately $75m.

In a recent announcement from Lloyd's, it confirmed that the market's net loss stemming from the tsunami would be in the region of £100m, with a large percentage of that sum expected to be within the levels of expected catastrophe loss costs. Lloyd's emphasised that the priority now for its insurers was to assess and settle claims as promptly as possible.


But the event does serve as a warning to the reinsurance industry, with yet another major event slipping under the catastrophe modelling radar.

As David Doe, a director at Lloyd's broker AHJ Ltd, points out, referring to the tsunami and the events of 9/11 "the world has suffered two catastrophic events, just thirty-seven months apart from each other, that were not detailed as realistic disaster scenarios." This is perhaps not surprising as the return period on high impact events such as the Indian Ocean tsunami are so great that few would consider factoring such an occurrence into their risk equations. However, such infrequent events seem to be cropping up on a much more regular basis, with a number of potential disasters also lurking in the wings. "There are certainly some nasty, and indeed, very realistic disaster scenario's possibly awaiting the world," Mr Doe warned. "For instance, what about any one of the following: the Canary Islands landslide and the ensuing tidal wave hitting the East Coast of America; massive flooding of Central London; a major earthquake in California or Japan. If these events were to occur, what would the likely quantum insured loss figure be? $400bn or maybe $1trn?" "The wider insurance and reinsurance industry needs to take stock," he added. "This is not necessarily a case of requiring more premium for risk, but rather more likely that insurers and reinsurers cut back on their aggregate risk exposures."

January renewals

While the tsunami occurred too late in the season to have any impact on the 1 January renewals, many suspected that the glut of storms which hit Florida and Japan in the third quarter of 2004 would put the brakes on sliding property catastrophe rates. Early indications show that loss affected programmes saw rate increases of approximately 20%, with regions such as the Bahamas, the Cayman Islands and Grenada seeing price hikes of up to 50%, according to Benfield's reinsurance renewals analysis. However, any suggestions that the losses sustained by the market would see the decline in general property cat rates slow appear to have been proved wrong, with most of the renewal commentaries indicating that prices have continued their downward trend.

Perhaps the greatest impact of the hurricanes was on the Marine & Energy sector which experienced insured losses of between $2.5bn and $3bn, primarily attributable to Hurricane Ivan, with approximately two thirds of this sum resulting from business interruption.

The general consensus was that reinsurance spend was flat to slightly down on the 2004 renewals, with strict reinsurance budgets being adhered to and buyers more willing to retain the risk rather than overstep their allotted spend.

The cycle

Even though prices continued to slide across a number of lines, such rate reductions were on the whole kept at "sensible levels" according to Stephen Searby of Standard & Poor's. However, Mr Searby warned that the biggest threat to the industry still remained. "Periods of strong profitability have historically been followed by cyclical downswings in pricing to often uneconomic levels," he said. "Despite the current discipline, this danger remains."

Nigel Allen is editor of Global Reinsurance.