A catastrophic year! Insurers brace for record losses in 2011

With about 355 significant loss events totalling more than $60 billion in insured losses so far this year, statistics point to global insured losses exceeding the 10 year average by at least five times. What does the insurance industry think about 2011? A

As global warming takes its toll and the natural disasters follow one after the other, the global insurance outlook remains unexpectedly soft. This trend is counter-intuitive as given the rash of natural disasters witnessed over the past 18 months. However it makes sense when one looks at the scale of loss that the global insurance market has been able to absorb in the past. Recent catastrophes don’t, for example, match the cost of the 2001 World Trade Centre bombing or of Hurricane Katrina in 2005.

The World Trade Centre disaster “cost” the industry $23 billion, while Hurricane Katrina led $71 billion in overall claims. These massive losses were borne by the global insurance and re-insurance markets at the time – although the market hardened briefly after each incident.

Sophisticated strategies required

“The global insurance industry uses sophisticated strategies, new technologies and the capital markets to better prepare for years like 2011 – and beyond,” says Justin Naylor, of Etana. Naylor is a recipient of the Alois Alzheimer Scholarship hosted by Munich Re for individual expert insurers of high potential from 11 countries, representing a broad variety of specialities. He says spending time at Munich Re in Munich, the GDV (German Insurance Association) in Berlin and at Lloyds of London and Munich Re in London, gave participants a global perspective and understanding of where the industry is headed.

“While Hurricane Katrina remains the most devastating single insured loss event in history, current estimates point to 2011 being remembered as the worst loss year on record in terms of economic losses due to the unusual accumulation of catastrophic events,” he says.

2011: A year of natural disaster

Some of the natural catastrophic events that have contributed to this record breaking year include:

• The earthquake in Japan on 11 March 2011 was the biggest event for the year and goes down as a record in terms of its $210 billion in total economic loss. A total of 15, 500 lives were lost while insured losses – based on current estimates – surged past $30 billion.
• The earthquakes in Christchurch, New Zealand, in February and June 2011 were responsible for more than $10 billion in insured losses.
• The United States is having a record year for tornadoes with 1, 600 registered for the year so far. These events have added about $10 billion in insured losses for the industry.
• Australia was also in the news in the first half of 2011 for the severe flooding caused by excessive rainfall which led to $2.5 billion in losses to the industry.

Economic uncertainty

The amount of risk capital available to the insurance sector contracts during periods of financial market uncertainty. So over and above the extraordinary natural catastrophes the insurance industry has faced this year, we have also had to contend with uncertainty in the financial markets worldwide.

Europe has been full of reports about extreme volatility and uncertainty in the world’s economy. Because the insurance and reinsurance markets are driven by the availability of capital, this is likely to place additional pressure on the industry through 2012.

What 2012 holds in store?

Although most players with exposure to the recent catastrophes will post half year losses, the credit ratings outlook for most of the industry remains stable. The mood internationally is fairly upbeat considering the year we have experienced thus far. It seems most stakeholders are at peace with the fact that years like this are the reason we are in business.

Naylor adds: “I feel a sense of pride to work in the insurance industry when I see the true value we add to society and the world in times like these. There is no doubt that the affected markets will harden substantially, and that global players will assess all of their portfolios in terms of risk and return. Fortunately the general consensus is that there will not be an overall market hardening with the next renewal seasons.”

A robust insurance industry

Why is our industry much more robust after such a tough year? What exactly has changed? “We have learned from the past and improved,” says Naylor, who shares the details of current developments. The global industry is learning continuously from previous large loss events, such as Hurricane Katrina, and is better prepared for large losses and accumulation scenarios.

• With each new catastrophe or loss, the industry adds new scenarios to their increasingly sophisticated models. We learn more about underwriting and budgeting for claims as a result of catastrophes and we up the game in terms of risk management.
• Most of the big players have diverse business models using sophisticated strategies. This includes risk-based steering to guide the direction of their businesses so that when they lose in one market, they are at least recovering some of the loss from others.
• The industry is using new technologies like geo mapping to plot risks and potential accumulations from key loss scenarios. In some ways they are already prepared for years like 2011.
• In addition, the industry has built up better insurance and reinsurance structures and now even uses the capital markets to source funds from investors in the form of Catastrophe Bonds (also known as cat bonds) as well as other forms of insurance-linked securities. Cat bonds were first used in the mid-1990s in the aftermath of Hurricane Andrew and the Northridge earthquake.

Solvency II well received

Naylor observed that the European insurance standard, Solvency II, would have many positive spin offs: “Lastly, although it is not yet implemented, it appears that Solvency II has already had an incredibly positive effect on the industry. Over the past few years most players have been gearing up for its implementation.

“While a challenge to implement, Solvency II is light years ahead of Solvency I because it takes into consideration a much wider variety of risks, including insurance risk, asset risk, credit risk, governance and risk management. As insurance businesses come under increase scrutiny they will be better equipped to deal with catastrophe-rich years such as the one we’re in now.

Meanwhile, in South Africa

“With regard to the South African insurance industry, after my experience in Europe with Munich Re, I believe that we will not be severely affected by these global events, provided our insurers continue to apply sound underwriting and risk management principles. “We must continue to evolve and learn from what is happening in the rest of the world. The fact that ‘know’ and ‘grow’ are core Etana values – and among the reasons I was selected for this course – gives me confidence. Our dedication to specialist business protection – and being on the knowing, growing and improving path – is essential to insurance success today.”