Reinsurers tightened capacity for unmodelled perils at key renewal date

The impact of last December’s floods in Thailand has begun to be felt in the latest round of reinsurance renewals. The result is that some reinsurers have reduced capacity and rates have risen steeply for loss-affected business lines.

Japanese insurers were hit particularly hard by the floods, says broker Guy Carpenter in its renewals report, as many insureds had relocated manufacturing operations to Thai facilities after the Tohoku earthquake, only to suffer further losses.

The floods will cost (re)insurers $12bn, according to the latest figures from Swiss Re Sigma, although Guy Carpenter puts the final market loss at $15bn to $20bn.

The losses have contributed to the industry’s second highest loss year on record (with total catastrophe losses at $116bn according to Sigma), with two thirds of the losses emanating from the Asia Pacific region.

Ignored exposure

The losses, in particular the floods, have led to a reassessment of exposures in unmodelled – or poorly modelled – regions, particularly for overseas/Japanese insurance abroad (JIA) catastrophe excess of loss cover.

 

The overall loss from the Thai floods is still developing and it may take a number of years until final numbers are determined, but the technical and psychological impact of this loss on the global insurance industry will far outweigh the ultimate financial loss for years to come’

Peter Hearn, Willis Re

 

Guy Carpenter says: “Heavy losses in Thailand caused all buyers to revisit their overseas strategy. Perception of risk was shaken up by the unexpectedly large nature of the Thailand flood losses.”

“Those covers that existed were generally small in comparison to the losses. These losses and the subsequent changes in per risk protections that ensued resulted in a significant increase in the amount of overseas (excluding Japan) cat purchased.”

Rate hikes

Larger Japanese property per risk treaties were also significantly affected by the Thai flood claims. For loss-hit accounts there were rate hikes of between 25% and 100%, according to the Willis Re 1st View April renewals report. There was some restructuring and prices for excess of loss covers went up considerably.

The magnitude of the loss from this “largely ignored catastrophe exposure” was a surprise to most, according to Willis Re chairman Peter Hearn.

He said: “One of the most difficult losses the global industry has had to manage is the flood loss which occurred in Thailand at the end of 2011. Exposures were significantly underestimated, especially as regards the extent of global connections across sophisticated supply chains.

“At the same time, it undermined the basic concept of geographic diversification in writing natural catastrophe perils. Reinsurers, as a result, are seeking greater transparency and control, particularly over contingent business interruption exposures and are acquiring greater emphasis on all other areas of unmodelled risk.”

“This is leading to tighter sublimits for natural catastrophe and reduced event limits on pro rata treaties. The overall loss from the Thai floods is still developing and it may take a number of years until final numbers are determined, but the technical and psychological impact of this loss on the global insurance industry will far outweigh the ultimate financial loss for years to come.”

Fragmented market

As predicted, overall the 1 April renewals was a mixed bag, with reinsurers taking a customised approach to risk selection as they did at 1 January.

There were no “blanket” rate increases, according to Willis. While there were notable price rises on loss affected business, elsewhere non-catastrophe rates remained flat or hardened slightly and non-loss affected catastrophe classes saw rates increase by 5% to 20%.

A classic hard market remains elusive amid plentiful industry capital, “an extraordinary testament to the industry’s financial capability to absorb more than $100bn of insured losses in 2011”, Hearn says.

The benign start to 2012 has also helped. Insured losses during the first quarter are expected to be less than $5bn, according to Guy Carpenter, significantly lower than losses of over $50bn in the first three months of 2011.

Sufficient capital

The reinsurance broker notes: “Despite the heavy losses of 2011 the reinsurance sector continues to function normally and has sufficient capital to support the Asia-Pacific region and the global property/casualty (PC) industry, with reinsurers continuing to support the Japanese market at 1 April.”

In parts of the market that are becoming more restrictive, new capital is quickly entering to plug the gap. Sidecar capacity, including Lancashire’s Accordion, was deployed for the April renewals alongside cat bonds, industry loss warranties and other non-traditional capacity.

Japanese ceding insurers are evaluating the capital markets as an alternative and/or supplemental source of risk transfer capacity, says Guy Carpenter. In February, Zenkyoren’s issuance of the Kibou cat bond secured $300m of limit and was the first single Japanese earthquake peril bond since 2008.

Falling out of favour

Hearn says: “In an improving rating environment, new capital continues to be drawn to the global reinsurance industry, but on a different basis than in previous ‘classes’. The traditional model of starting up reinsurance companies post-major events appears to be falling out of favour. Investors are now concentrating on accessing selected classes of reinsurance risks through specialist funds and other structures.”

And as some reinsurers pulled back, others were waiting in the wings to deploy capacity. Ever the opportunist, Berkshire Hathaway has become one of Thailand’s biggest reinsurers, seemingly overnight. And, timed for the 1 June ‘Florida Book’ renewals, Validus has launched new Class 4 Bermuda reinsurer PαCRe to focus on top layer reinsurance programmes.

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