The catalogue of natural catastrophes in 2010, in Asia and elsewhere, seems unlikely to translate into firmer rates at the 1 January reinsurance renewals. But the rise of Asian megacities leaves the region vulnerable
The first half of 2010 was characterised by a large number of natural catastrophes around the world. With more than 440 events, overall losses of $70bn were recorded, with insured losses expecting to reach $22bn – more than double the first half average since 2000 – according to Munich Re’s Geo Risks Research unit.
Among the notable catastrophes were the earthquakes in Haiti, Chile and Yushu, China; Winter Storm Xynthia in Europe; and the eruptions of the Icelandic volcano Eyjafjallajökull. While many of these events were human catastrophes – in particular the earthquakes (between 250,000 and 300,000 people died in Haiti and 2,698 in Yushu) – they occurred in areas of low insurance penetration. The most costly event from an insurance perspective was the earthquake in central Chile in February. Total losses are currently estimated at $30bn, with insured loss estimates ranging from $4bn to $8bn.
In the second half of the year, Asia has borne the brunt of natural catastophes. Flooding in Pakistan, landslides in China and an earthquake in New Zealand have caused widespread devastation at a time when the typhoon season is still under way. However, it is unlikely that these events and others around the world are sufficient to turn the region’s soft reinsurance market.
Ample capacity and competitive forces continue to keep rates down despite the growing awareness of Asia’s very real catastrophe exposures. “There’s a lot of interest in Asia,” Kiln Asia’s regional managing director, Neil Wray, says. “There are lots of headline growth figures that are reported and that’s increasingly attracting more and more companies to have some sort of representation here.”
As the flood waters recede and aid agencies struggle to reach stricken villages, it is clear the destruction wrought by the flooding in Pakistan that began in July is far from over, with waterborne disease a growing concern. As of late August, at least 1,645 people were reported killed in the floods, with more than 2,479 injured and hundreds more missing, according to Aon Benfield.
Over 17.6 million people have been affected in the hardest-hit provinces of Khyber Pakhtunkhwa, Punjab, Sindh and Balochistan – more than the 2004 Boxing Day tsunami, Kashmir earthquake and Haiti earthquake combined, according to Pakistan’s National Disaster Management Authority.
There has been extensive damage to property, infrastructure, telecommunications and agriculture over 160,000 km², with an estimated 250,000 homes damaged or destroyed. Economic losses due to crop damage include $925m for cotton (20% of the crop), $600m for more than 80,000 hectares of sugarcane, $247m for rice, $259m for maize, $200m for wheat stock and $518m for fruit, vegetables and fodder.
From an insurance perspective, there has been little commercial impact, despite the widespread devastation. Estimates for total economic losses range from $15bn to $43bn, although Aon Benfield reports that a final loss of $20bn “seems plausible”.
Large claims are expected from agricultural accounts, including losses for microinsurance providers. With seeds for next year’s crops washed away, it is thought farmers could lose up to two years’ income.
New Zealand has funds
In contrast, there have been no deaths as a result of the M7.1 (M7.0 according to USGS) magnitude Darfield Earthquake that struck Christchurch on New Zealand’s South Island on 3 September, but the expectation is for high insured losses, particularly for residential properties that are included in the country’s earthquake pool.
Economic losses are currently estimated at $2.5bn to $3.5bn, with insured losses reaching $1.5bn-$2.5bn. However, most losses to residential buildings will be insured by New Zealand’s Earthquake Commission (EQC). EQECAT estimates that of total economic losses of $1.5bn-$2.5bn, up to $1.3bn-$2bn will be covered.
The Canterbury plains have suffered relatively little earthquake activity in the past, compared to the north and west of the South Island. The most recent major earthquakes near Christchurch include the 1888 M7.3 Canterbury earthquake, approximately 150km north-northwest of Christchurch, and the 1929 M7.1 Arthur’s Pass earthquake, approximately 100km northwest of Christchurch.
However, geological investigations show the area around Christchurch to be capable of moderately large earthquakes, notes EQECAT. With building codes in force since 1935, damage was highest among older commercial buildings built of unreinforced masonry (URM), some of which partially or completely collapsed (they were empty at 4.35am when the earthquake struck).
Only a fraction of the losses to URM buildings is likely to be insured: EQECAT estimates around $200m-$500m of total losses of between $900m and $1.2bn. It notes that liquefaction-induced damage at the Port of Lyttelton could comprise a significant portion of insured commercial losses.
The earthquake is not expected to have a major impact on insurers and banks, according to Moody’s Investors Service. “Due to very conservative reinsurance arrangements, the expected losses retained by general insurers will be minimal,” Moody’s vice-president and senior analyst Wing Chew says. “The bulk will be covered by the EQC natural disaster fund.”
Exposure of Asian megacities
Despite the high incidence of natural catastrophes, so far the expectation is that insurance and reinsurance prices will remain soft for catastrophe-exposed classes on 1 January. However, the Atlantic hurricane season is not yet over and a major loss there could have implications for the Asian market if enough capital is depleted.
Locally, there has been some impact on rates from catastrophes, but these have been isolated to loss-hit accounts. “The typhoon [Ketsana] losses have resulted in increases in pricing both by insurers as well as reinsurers,” Asia catastrophe pool practice leader at Asia Capital Reinsurance Group, Werner Bugl, notes.
“In contrast, the typhoon Morakot, which caused havoc in Taiwan at about the same time led to heavy economic losses but relatively moderate insured losses and did not affect pricing of (re)insurance covers. In general, hardening rates tend to be experienced only by those markets that have suffered major insured natural catastrophe events, but not across the whole region.”
In China, with the regulator emphasising the importance of catastrophe risk management, and signs that underwriting trends are changing, insurance take-up is expected to grow. A trend away from proportional reinsurance to excess of loss covers should help to maintain price discipline in the market.
“The recent nat cat events are shaping underwriting practice,” head of non-life underwriting at Munich Re in Beijing, Fan Weishu, says.
“For example, the 2008 winter storms in China have made many insurers more cautious on transmission and distribution lines [T&D] exposures. Some of them completely stepped out of T&D. In recent years, China’s insurance industry has started to become more cautious on flood exposure, avoiding or adding loadings for exposure in high flood risk areas.”
The loss scenarios that could turn the market in Asia include a major earthquake or typhoon in Japan. As Asian economies continue to grow and amass wealth, low-frequency/high-severity events could have more impact.
“Megacities in China are posing inherent problems,” Bugl says. “By 2070, 10 Asian cities will rank in the top 12 cities notorious for extreme exposed population, namely Tokyo, Jakarta, Kolkata, Mumbai, Dhaka, Guangzhou, Ho Chi Minh City, Beijing, Shanghai and Bangkok.
“The rapid expansion of most of these cities is at the expense of non-engineered residential structures,” Bugl continues. “In addition, many of Asia’s coastal cities are threatened by subsidence on account of over-building and groundwater depletion. Indonesia’s capital, the so-called ‘Sinking Jakarta’, could possibly be submerged by 2025.
“The combination of rising sea levels, storm surges, typhoons, tsunamis and volcanic eruptions, as recently experienced with Mount Sinabung, North Sumatra, which had lain dormant for 400 years, is a very explosive cocktail.”
As these cities develop and insurance penetration grows, the potential impact from such catastrophes is likely to become more profound. For now, the burden of losses in most of Asia’s emerging economies will continue to fall to governments. GR