The reinsurance market appears close to a turning point. Rates typically rise following a major disaster, such as an especially bad series of hurricanes or the terrorist attacks of 9/11. The last market turn was in 2005, when Katrina and other hurricanes caused massive losses.
Today, severe losses caused by hurricanes are also significant. The losses from hurricane Ike, which struck in September, were underestimated. Initial estimates by Risk Management Solutions were for $7bn (£4.7bn) to $12bn, but it now expects Ike to cost $13bn to $21bn. The revised estimate makes Ike the third most costly US hurricane, after Katrina and Andrew. Ike, even when combined with hurricane Gustav, would probably not be enough to turn the soft market.
But in 2008 there is of course a second factor: the financial crisis. Insurers have suffered losses on both sides of their balance sheets – on assets as well as liabilities. The credit crunch, and its effects on bond and share markets, has eroded their investments. With weaker balance sheets, insurers are keener to transfer risk.
The soft market has been long sustained, and a hard market may well be due. Renewals on 1 January will be studied closely.
Obama and offshore
Barack Obama’s victory has rightly caught the imagination of the world. But it is also worrying some reinsurers. During his election campaign, Obama frequently mentioned closing corporate tax loopholes and ensuring that companies pay their fair share. His campaign ran a television advertisement that said: “John McCain went to Bermuda and, while he was there, pledged to protect tax breaks for American corporations that hide their profits offshore.” The US government is running the largest deficit since the second world war – a great incentive to increase tax revenues – and the increased Democratic majority in both houses of Congress will make it easier for the White House to push through change.
Although the Bermudian insurance industry has grown because of the island’s fiscal policy, it is now a thriving market and a centre of expertise, as I discovered when I went there myself recently. Over the past six years, the Bermudian insurance industry paid $25bn in US property catastrophe claims, the largest share of any non-US market. For Bermuda to be damaged as a centre of excellence would be a loss for the worldwide insurance industry.
It would be myopic to think Obama’s only concern about the insurance industry is how to extract more tax from it. He also supports a greater federal government role in disaster financing; and another idea he has backed is a tax on large corporations that do not offer health insurance to their employees. Obama has a lot on his plate, and does not lack for pressing financial problems.
However, even if he acts in a measured way on reinsurance taxation, it would be a mistake to suppose that the Obama administration will be the only government looking hard for ways to increase tax revenue. European governments will do the same. And many of them will have the insurance industry in their sights.
David Sandham, Editor