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Sunday, January 1, 2012
Softening up

Despite ever more evidence of global warming and an increase in natural disasters over the last 18 months, the global insurance outlook remains unexpectedly soft. This trend is counter-intuitive as, given the recent rash of natural disasters, one would have expected the market to be hardening.

Yet when one looks at the scale of loss that the global insurance market has been able to absorb in the past, the last 18 months of catastrophe don’t, for example, match the cost of the 2001 World Trade Centre bombing or Hurricane Katrina in 2005. Certainly, “taking a longer term historical view helps explain the markets’ current resilience,” says Tom Healy, Unit Leader, Knowledge Centre, Alexander Forbes Risk Services.
In terms of international insured major loss events, 2008 and 2009 were both considered benign from an insurers’ point of view. As such, global insurers and reinsurers were able to make solid annual underwriting and corporate profits while strengthening the risk reserves in their balance sheets.
Last year, however, heralded the start of a sequence of insured major loss events that has continued into 2011. These events, and their estimated cost to the global insurance industry in US dollars, include:

Yet, to put these figures and the catastrophes that drove them into perspective, it must be noted that the 2001 World Trade Centre disaster alone bordered on $23 billion, while Hurricane Katrina in 2005 drew $71 billion in overall claims. Both these massive losses were borne by the global insurance and re-insurance markets - even if the market did harden briefly at the time of each incident.
“These past experiences and the current level of insurance capacity and competition in the market makes it easier to understand why, despite 18 months of almost non-stop natural disaster drawing $94 billion in claims, the current market has remained stable,” says Healy.
In short, most insurers and reinsurers have been able to absorb recent events within their annual trading results and reserves, without the broader market hardening globally. That said, since pay-outs for major catastrophes often take many months, if not years, to be calculated, agreed and paid, many top international insurers’ 2011 first quarter results were not significantly affected.
As such, “despite the resilience that we’re seeing, the progressive softening in the market over the last few years is probably bottoming out,” he comments. Careful attention should, therefore, be given to the 30st June 2011 half-year insurance and re-insurance results reported internationally from around mid-July onwards as these are likely to reflect more accurately the full impact of recent natural disasters. Furthermore, the current Caribbean hurricane season from early June to late November will be closely watched. Any more major natural disasters in 2011 will add pressure for a hardening of the insurance cycle.
In summary then, the resilient soft market of the last few years has probably bottomed out, with the prospect of some hardening if there is an escalation in the frequency and/or severity of insured major loss events over the second half of 2011.

Copyright © Insurance Times and Investments® Vol:25.1 1st January, 2012
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