A string of costly natural disasters in the first months of 2011 has rung down the curtain on the prolonged soft market. Expect the cost-of-capital trickle-down to commence.
By GRAHAM BUCK, who covers European risk management issues
LONDON---Industry analysts have been saying for several years that it would take a major natural catastrophe of Hurricane Katrina proportions to reverse the trend of steadily softening rates in the reinsurance market. Nature has duly delivered a string of calamities in the early months of 2011, with Japan's tsunami and earthquake in March currently estimated to cost the insurance industry $24 billion and last month's tornadoes in Alabama and neighboring states leading to upward of $6 billion in losses.
Add to these the earlier extensive floods in Australia and a damaging earthquake in the New Zealand city of Christchurch, and the year is already challenging 2005 as the costliest on record for the industry, with the combined first-quarter tally of $50 billion.More than $6 billion of this figure has fallen on Bermuda's insurance and reinsurance community, with PartnerRe Ltd. hardest hit at $1.07 billion.
Across the Atlantic, the bill for Lloyd's of London comes to $3.8 billion--which already exceeds the figure for the whole of 2010.
The reinsurance industry's two main players, Munich Re and Swiss Re, have reported first-quarter net-income losses of $1.4 billion and $665 million, respectively. Munich Re said that natural catastrophes in the first three months would cost $3.9 billion (2.7 billion euros) and warned that rates for June 1 and July 1 renewals are set to rise.
There are already signs of hardening, with an average rise of 3 percent for reinsurance contracts renewed in April, rising up to 50 percent for Japan business
London companies such as Hiscox and Amlin forecast that U.S. catastrophe cover will bear a 10 percent increase.
"In the United States, with the Atlantic hurricane season approaching, the combination of international loss events and loss-modeling changes made by a major catastrophe firm (RMS) is resulting in increasing rates," said Amlin's chief executive, Charles Philipps.
RATINGS AGENCIES SOUND OFF
However, the parallels between 2005 and 2011 only go so far. Oldham, N.J.-based ratings agency A.M. Best reported earlier this month that it does not expect a similar post-loss influx of new companies to create a "Class of 2011," as it doesn't believe the necessary long-term capital and new management can be secured.
Instead, it expects the special-purpose vehicles for defined risk periods, the so-called "sidecars" that emerged in the wake of Katrina, to be the preferred capacity provider.
The ratings agency's latest market analysis, which maintained a "stable" ratings outlook for the global nonlife reinsurance market, referred to "growing pressure" to support increased rates in the property/casualty insurance and reinsurance markets.
Yvette Essen, an analyst for A.M. Best, said that the catastrophic first quarter means that many reinsurers will struggle to record any full-year underwriting profit for 2011.
"The industry faces further challenges in achieving profitability as the hurricane season approaches and investment yields remain low," she commented.
"While reinsurers continue to maintain sound capital positions, the excess capacity that existed at the prior year-end has clearly been diminished," he said.
RATE HIKE OR BUST
In London this week, Lloyd's chief executive, Richard Ward, bluntly warned that insurers faced the options of either hiking their rates or going out of business. The market's "lucky streak" of fairly benign hurricane seasons, most notably in the past two years, could be about to end.
"Prices are dangerously low at present," Ward told an industry conference. "Clients may think they are getting a bargain. But the fact is that they are buying security. The insurers who write unprofitable business are inevitably the first to collapse when disaster strikes."
A report issued by the venerable insurance market draws parallels between 2011 and 2001, when, as it notes, "the tragic events of 9/11 occurred during a soft market and Lloyd's recorded a combined ratio of 140%."
The Lloyd's chief added that the most recent spate of natural disasters, and their effect on industry and travel, reflected an increasingly systemic nature to catastrophes.
"Risk travels further and faster," he observed.
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