Market uncertain as to whether Japanese disaster will raise primary rates

“I think it is too early to tell,” said Hans Jörg Schill, the risk manager of Frankfurt Airport and managing director of Airport Assekuranz Vermittlungs GmbH, the in-house broker of Fraport, which manages numerous airports worldwide. “It could have an impact on catastrophe property insurance rates; it depends on how big the impact will be on the reinsurers.” “Obviously, the reinsurance market is already voicing great concerns, although, at the same time, a lot of them are saying it is not going to affect us that badly,” said Reiner Siebert, Managing Director of Albatros Versicherungsdienste GmbH, the in-house broker of German airline Lufthansa. “Certainly the reinsurers will try to generate an impact and, if they are successful, there would be a knock-on effect for the primary market,” added Mr Siebert, who also heads Lufthansa’s insurance and reinsurance businesses, Delvag and Delvag Rück. “However, it has been said many times before and it has not happened, so I think we probably will know a little bit more when we all meet in Monte Carlo.” hideBut for others, the 11 March catastrophe is a market turning event that will reverberate on the primary side. The 9.0 magnitude earthquake and subsequent tsunami caused massive destruction to Japan’s north-east coast. Some 28,000 people are reported either dead or missing. Radiation continues to leak from the crippled Fukushima nuclear power plant, 250 kilometres from Tokyo, where workers have struggled to prevent a nuclear disaster on the scale of Chernobyl. Japanese authorities have said that the damage from the quake and tsunami could exceed $300bn. The figure, which covers damage to roads, homes, factories and infrastructure, would make it the world’s costliest natural catastrophe, surpassing losses from the Kobe quake in Japan in 1995 and Hurricane Katrina in the US Gulf region in 2005. Catastrophe modelling firm AIR Worldwide estimated the insured loss at anywhere from $20bn to $30bn, narrowing its initial estimate that went up as high as $35bn. Another modeller, EQECAT Inc, estimated the insured losses between $12bn and $25bn. “The full extent of losses will not be clear for weeks when you factor in contingent business interruption,” said Axel Theis, chief executive of Allianz Global Corporate & Specialty, in an email statement to Commercial Risk Europe. “But make no mistake, from a purely financial perspective this is a wake-up call to a market in which rates are at historic lows.” Global reinsurers should have the capital to absorb losses from the disaster, according to analysts. However, the cumulative losses from a string of catastrophes in the first quarter means many reinsurers are not likely to achieve underwriting profits for the full year. Swiss Re and Munich Re have been among the hardest hit, estimating claims from the Japan quake, net of retrocession and before taxes, to be around €854m and €1.5bn, respectively. Munich Re noted that its cumulative cat losses in the first quarter already amount to over €2.5bn—including the earthquake in New Zealand, the floods in Brisbane and Cyclone Yasi in Australia—which means the reinsurer’s profit target for 2011 of around €2.4bn is ‘no longer achievable’, the company said. Mr Theis of AGCS said these factors will impact the primary market. “We have three major cat events in the first quarter which have resulted in reinsurers announcing some major losses and—as we all know—what hits the reinsurers ultimately hits the primary market,” he said. “Rates must reflect risk—it is a simple matter of economic necessity.” Still, some analysts are sceptical that primary rates outside of Japan and other loss-affected areas will rise due to the disaster. “Without a doubt, [the March 11 catastrophe] is certainly going to have a big impact on international property catastrophe reinsurance rates after the run of losses that there has been: Australia, New Zealand and now Japan,” said Ben Cohen, an analyst with Collins Stewart, an independent financial advisory group based in London. That ‘big impact’ applies primarily to reinsurance in the affected areas, although Mr Cohen expects reinsurance rates to at least stabilise everywhere —against earlier expectations of 5% to 10% declines. He also expects pricing pressure in other related lines where there will be losses, namely onshore energy, direct property pricing for international large risks and possibly some marine lines. But as for the impact on primary rates outside of Japan and Australasia, Mr Cohen thinks it will probably be ‘fairly limited’ due to the large amount of surplus capital in the primary insurance industry. “The Japanese domestic market is very much a domestic market, so the knock-on impact is going to be less because those companies generally do not have large operations in other parts of world, particularly not in the US or continental Europe.” Business interruption coverage may be the exception, Mr Cohen added. "BI falls in the category of insurance that is very likely to be impacted everywhere. It just depends on how widely this loss is felt in Europe, the US and Japan—and that is certainly hard to quantify now. I think primary buyers would expect their prices to rise, particularly in the more sophisticated industries," he said. Miles Trotter, general manager, analytics at A.M. Best Europe in London, also does not think the catastrophe in Japan will lead to a general hardening in primary rates. “It is not losses directly from that market,” he explained, “and the losses that we have—although they will lead to a poor first quarter for reinsurers—are not sufficiently large enough to significantly deplete capital, which began the year in a strong position. “So although the losses are large, they are not large enough to turn the reinsurance and insurance industry as a whole given the starting position, which was good from a capital point of view,” Mr Trotter said. As for the reinsurance impact, Mr Trotter agrees that business impacted by recent losses in Chile, New Zealand, Australia, and now Japan could be affected. There may also be some reassessment of so-called non-peak catastrophe areas, such as Chile, New Zealand and Australia. “These were meant to be lower risk areas to write catastrophe business, but recently have proved to be very active. Whether a hardening in reinsurance rates in affected areas extends to a wider hardening for catastrophe business, in general, I think is more doubtful,” Mr Trotter said. For example, as a result of these losses, he does not believe there will be a ‘meaningful or sustained hardening’ in US catastrophe rates, which come up for renewal in June and July. From a broker perspective, Andrew Laing, Property and Casualty Broking Team Leader at Aon Risk Solutions’ London Broking Centre, expects the Japan quake to cause ‘considerable tension in the global property markets’. Speaking as part of an Aon webcast on the Japan quake, Mr Laing said it was still too early to draw conclusions on the long-term impact on carriers in London, continental Europe and Bermuda. “While there is a lot of speculation on the ultimate size of the insured loss from the Japan event, it would seem that the total of all international cat events in Q1 is likely to have some impact on pricing, if not across all regions, certainly in the most recently affected parts of the world,” he said. One of the ‘very big unknowns’, Mr Laing noted, is the potential impact on the property market for contingent business interruption and contingent extra expense losses. A full version of this article will appear in April's issue of Commercial Risk Europe.

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