Taking the Pulse

In the wake of a very bad catastrophe season in 2011 Q1, global reinsurers, commercial insurers and risk managers have understandably undertaken a self-assessment of the industry’s financial health.

And based on an overall analysis of recent public statements, financial analysts seem to be in agreement the industry was in good shape to absorb the body blow that was the first quarter of this year. Although there is still a niggling feeling there might be a straw out there – namely an active hurricane season – that might break the camel’s back.

Preliminary estimates show the Japanese quake and tsunami alone could cost the global insurance industry upwards of $27 or $28 billion, and the March 2011 earthquake in Christchurch, New Zealand could top out at roughly $8 billion. Those are just two events, and the industry is already out almost $36 billion. [As of press time, tornadoes in the southern United States have added about $2 billion to the tally.]

These are only preliminary estimates; not the same as the hard figures counted from actual claims files. For example, one modeler’s preliminary estimate in August 2005 declared insured losses from Hurricane Katrina should not exceed $600 million. Two months later, estimated insured losses related to Hurricane Katrina turned out to be more on the order of between $40 billion and $55 billion. This is an extreme example to demonstrate the point that we are still too early in the game to figure out the true outcome.

Be that as it may, the insurance industry wants everyone to keep a sense of perspective. Aon Benfield, for example,notes in a recent report that members of its global re/insurance industry aggregate collectively hold about $248 billion in shareholder funds. And analysts from Advisen to Guy Carpenter have reassured everyone it would take catastrophes on the order of between $75 billion and $150 billion before global re/insurers would start to feel the pinch and amass more capital.

Basically, the industry’s verdict is that these are not “market- changing” events.

Fair enough. But when you consider these global disasters on a cumulative basis, the numbers start to look foreboding. We’re barely 16 weeks into the year and already we are between one-quarter and halfway to the analysts’ projected target for raising more capital. Certainly, some re/insurance segments, most notably casualty lines in catastrophe-hit areas (i.e. in Japan), are seeing some signs of price increases. And some particularly exposed businesses are not seeing their coverage renewed.

One can only imagine what might happen if hurricane forecasters are correct in their predictions for 2011. The general consensus seems to be an elevated chance of a major hurricane hitting the United States or Canadian East Coast. If a Katrina hits Miami, we may in fact, despite record levels of capital, see the straw that broke the camel’s back.

Some in the industry might say the mere mention of this type of scenario is “alarmist.” That’s an odd response, given that this industry is expected to prepare for the worst, most extreme forms of risk. Any company can prepare for the most statistically likely form of risk. The real challenge lies in making sure capital testing is solid when the weird events happen in bunches. These are not, as many insurance CEOs point out, 1-in-200-year events anymore.

Lost in all of the financial reporting is this: these events point to the need to review whether or not coverage is meeting the insureds’ needs and how that coverage might be improved/streamlined.

Generally speaking, these events have raised questions about how insurance policies respond when catastrophes follow closely on top of one another (fire following earthquake, for example, or tsunamis following earthquakes, or even earthquake ‘aftershocks’ rattling the same area as as an earlier earthquake).

Now might be an ideal time for insurers to review the merits/demerits of either bundling coverage for multiple loss causes into a general policy, or splitting coverages up into their various components and selling those segmented coverages separately (i.e. individual policies for fire, flood, earthquake, etc.) Different examples of how it can be done are available in Christchurch and Japan, and Canada might do well to review the efficacy of how well catastrophe losses are covered here.