That famous English poet, critic and lexicographer Dr Samuel Johnson once famously noted that “when two Englishmen meet, their first talk is of the weather.” Two hundred and fifty years later, his comment could be amended to reflect the conversation between catastrophe underwriters, particularly now the Atlantic hurricane season has stormed in.
According to the New York-based Insurance Services Office, second quarter catastrophe losses for the US property/casualty industry totalled $4.4bn, the second worst level in the past decade. In addition to an estimated $1.2bn from tropical storm Allison – the first of the 2001 Atlantic season – US p/c insurers were hit by $1.7bn from a huge thunderstorm catastrophe that stretched from Texas to Pennsylvania, and Midwest hailstorms costing $415m. The estimated $4.4bn in losses is up almost 30% on the same quarter last year, and is only fractionally short of 1998's record $4.5bn loss. And it's not just the US industry that's been feeling the heat. The three windstorms that blew through northern Europe towards the end of 1999 came too late for the year-end renewals to reflect re/insurers' loss experiences. In particular, the late December storms, Lothar and Martin, estimated by Swiss Re to have resulted in $8.2bn in insured loss and $5.4bn in reinsured loss, hit the industry hard at a time when rates were low and programmes as good as completed for the 2000 account.
It did, however, help kick-start the recovery of the sector, though whether this was in time for certain players is debatable. And re/insurers breathed a sigh of relief when last year's weather-related catastrophe figures showed only one loss nearing the $1bn mark – the floods in Tokai, Japan which hit an insured loss of around $990m, according to Sigma. This was in sharp contrast to the previous year, which weathered nine $1bn+ storms. Sigma's related analysis of the major markets indicated that 2000 was the year the cat prices started recovering. “It was only during the renewals for 2001, however, that a general rise became apparent,” it comments. “The 16% rise in the markets examined therefore signals a trend reversal, though one which only makes up for the losses suffered in 1998/99. According to the study [Sigma no.2/2001], further price rises are necessary if catastrophe reinsurers are to cover their costs in the long term.”
Catastrophe-related business was one of the first to turn to alternative risk markets, with players such as the Chicago Board of Trade and CATEX – now well past the 500 transactions mark – early into the game. Now, the so-called “alternative” products are becoming more mainstream, and traditional players in the re/insurance sector are taking the less traditional structures in their stride. Recent deals include Swiss Re and Tokio Marine and Fire, through its Bermuda-based Tokio Millennium Re, swapping $450m of cat risk in three equally-sized deals: Japan quake for California quake; Japan typhoon for Florida typhoon; and Japan typhoon for French storm. “Swapping exposures is a win-win situation for both companies. Swiss Re and Tokio Marine will both benefit from a diversification effect which will lower capital costs substantially, increasing shareholder value, “ said Jörg Stoll, director at Swiss Re New Markets when the deal was announced. “It is part of Swiss Re's strategy to more actively manage the risk portfolio and optimise capital at risk.”
Catastrophic weather events have hogged the risk limelight for many years now, but companies are increasingly looking at moving other weather-related risks off their balance sheets. It is this market that Global Reinsurance is addressing in this issue.
The recent announcement by Element Re, part of XL, is an indicator of the newer types of risk transfer being undertaken in the market. In this particular transaction, Element Re designed a multi-season insurance policy to protect Dallas-based Atmos Energy Corp against warmer than normal winter temperatures in several US cities, at an aggregate of $60m. Element Re's product follows on from the weather transactions pioneered by Enron in 1997; in fact, Element Re's executive v-p Martin Malinow was one of the co-founders of the Enron weather risk unit.
Enron's weather risk business is going from strength to strength, focussing primarily on weather derivatives. These, argues Enron, can help mitigate not only the exposed company's risk, but lower the cost of risk for reinsurers with weather exposures. Of course, where there is a derivative, there is a secondary market, and new players are coming to the table all the time. Spectron's Nick Ward explains how weather should be treated in a different way to other commodities, because it “is hardly a single, uniform commodity in itself,” he argues. Where, however, many of what he describes as “real world exposures” lie are in those days where small variations in weather conditions can have a large impact on an organisation's balance sheet – such as the coverage provided to Atmos.
Element Re's Mr Malinow describes his company's entrance into the weather risk market as taking the sector to the next level. Insurance, he argues, is more acceptable than derivatives, which are “notional contracts”, whilst there are accounting and regulatory benefits as well. In addition, issuers' credit ratings are becoming an increasingly important issue; “people are becoming more cognisant of bankruptcy risk,” he says. Now the energy industry is well aware of – and increasingly protected against – weather risks, many other industries are beginning to see the possibilities. “It is often the CFO, CEO or President we are talking to,” says Mr Malinow, as shareholders become increasingly aware of the opportunities to shed weather risk. And the more investors demand transparency and an acceptable return on investment, the more potential this market has to grow and grow.