A guest post in two parts by Paul J. Davies, the FT’s insurance correspondent. This is part one.
There are two big questions for reinsurers following the Japan quake. Number one: will it put a floor under the weak pricing for catastrophe risk of recent years and even lead to sharp increases? Number two, if there is a market turn, how long will it last?
It remains extremely difficult to pin down a reliable estimate for reinsurance losses from Japan – they stretch from $10bn to north of $60bn. The higher your estimate, the stronger your market turn.
There are a number of things that will hold losses down. Firstly, even though Japan has the world’s third-biggest insurance market at some $108bn worth of premiums annually, that represents the lowest coverage rate as a proportion of GDP of all the big markets. This is from Swiss Re, via Oriel:
Furthermore, residential cover mostly excludes earthquake, as does cover for nuclear facilities. Huge amounts of risk are retained within Japan and there is a large semi-public reinsurer, Japan Earthquake Reinsurance Co, part funded by the domestic industry, which takes a lot of earthquake risk.
Finally, the fact that Tokyo and Chiba seem to have escaped without too much direct damage ought to protect insurers.
More from Tom Dorner at Oriel:
Although it is clearly very difficult to tell and we note that earthquake losses often take longer to assess (the September New Zealand loss is an example of this), it seems that damage to Tokyo has been relatively modest by comparison to the rest of Japan. Catastrophe modelling agency AIR reports that “there have been relatively few reports of major structural damage in Tokyo and Chiba prefectures, though several serious fires broke out … there are likely to be many instances of nonstructural damage and damage to contents.” We note that the modest damage to Tokyo comes as a result of Japan’s high level of preparedness for earthquake losses and gives some comfort over the scale of potential exposures for the Lloyd’s insurers.
According to James Quin at Citigroup, the quake will very likely have come up a long way short of the industry’s Probable Maximum Loss modelled for a large Japanese event.
European reinsurers tend to provide disclosures of their exposure to a 1:200 year or 1:250 year Japanese earthquake. The main focus of such modelled losses is an earthquake that causes widespread damage in Tokyo, and we believe would be based around a total industry loss of around $50bn.
Kathy Fear notes the peak exposures estimated by the four biggest European reinsurers to the quake. While the declines in share prices so far suggest the market does not believe these are near to being hit – and Ms Fear also does not think they will be breached – she nonetheless notes the event will likely hurt earnings and may well turn the market:
Most bullish among the analysts in terms of impact on reinsurance pricing on Monday was Barrie Cornes at Panmure:
We would not be surprised to see an economic loss over US$100bn, and the insured loss in excess of US$60bn. In our view, the loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector, as sufficient capacity (capital) is withdrawn to allow rates to rise. A similar impact happened post 9/11. Share prices in the Lloyds-based sector will be under pressure in the next few days but, thereafter, the weakness may well provide a buying opportunity.
Andreas de Groot van Embden at JPMorgan Cazenove is more sanguine:
Impact on international reinsurance market unclear: The overall insured loss is likely to be well above the New Zealand Earthquake of February 2011 (insured loss $6bn-$12bn) but the exact impact on the international reinsurance industry and the Lloyd’s insurers remains uncertain.
The key will be how material commercial lines and marine losses will be and how much of this will find its way into the international reinsurance market. Lloyd’s insurers’ exposure to Japan is reinsurance rather than insurance.
Similarly, Gregory Locraft for Morgan Stanley in the US says:
With $30b of excess [industry] capacity eliminated an upswing in pricing is well underway across the Asia-Pacific region. Following the Japan event we now believe reinsurers have suffered large enough losses that many will seek higher global prices to recoup lost profits. We are doubtful this pricing trend can hold and continue to recommend “late cycle winners” until a sustainable pricing cycle is in place.
Japan update – energy and insurance – FT Alphaville