Thursday, 3 May 2012
Asian rates up at April reinsurance renewals with tougher terms for BI
Reinsurance renewals in April saw a general hardening of rates in Asia, with tougher terms for business interruption and international catastrophe exposures.
Devastation following Japanese earthquake and tsunami of last year
The April 1 renewal followed the second largest year on record for catastrophe losses, with some $116bn of insured losses in 2011, according to estimates from Aon Benfield’s Analytics team. Many of the largest losses were in Asia Pacific, including the Thoku earthquake in Japan, earthquakes in New Zealand, floods and cyclones in Australia and widespread floods in Thailand.
The April renewal is particularly significant for Asia, in particular Japan, which is one of the world’s largest reinsurance markets, said Malcolm Steingold, Chief Executive of Aon Benfield Asia Pacific. The renewal is also one of the first in which underwriters have been able to understand the extent of losses from last year’s events, he added.
In particular losses from the Thoku earthquake in March 2011 were complex and took time to quantify, he said.
“Despite the $116bn of catastrophe losses that occurred during the year, the reinsurance industry was highly resilient in terms of total reinsurer capital, which stood at $455bn at the end of 2011—a reduction of just 3% from the $470bn seen at the end of 2010,” explained Mr Steingold.
“The Japanese renewal confirmed that reinsurance capital remains resilient and substantial capacity remained available,” he continued. “Pro-rata Japanese earthquake capacity—a key indicator for the renewal—was placed in an orderly fashion, with a general increase in underlying rates, as would be expected.”
The renewal of Japanese reinsurance contracts in April is seen as a bellwether for the year ahead. It is also one of the first opportunities, other than the European-focused January renewal, for reinsurers to claw back some of last year’s catastrophe losses.
Reinsurance rates for earthquake risk increased between 10%–40% year-on-year as a result of the Thoku earthquake, according to Guy Carpenter. The increase over 2010 pre-Thoku earthquake levels ranged from 35% to 125%, with the highest increases on loss-affected programmes, said David Flandro, Guy Carpenter’s Global Head of Business Intelligence.
The Japanese renewal was in line with expectations, with increases in wind and quake cover, said Will Thompson, Regional Manager Asia Pacific, Middle East, Turkey & Africa at Willis Re. While there was adequate capacity, prices increased by up to 15% for windstorm exposures, a further 30% to 50% for loss-affected quake cover and 10%–25% for loss free earthquake business, he said.
There were also some restrictions in cover, most notably for overseas natural catastrophe exposures of Japanese insurers under their per-risk programmes, said Mr Thompson.
The flood losses in Thailand, in particular, caused unexpectedly high losses for Japanese and multinational insurers. As a result, reinsurers are applying tighter event limits to insurers with exposures to so called catastrophe cold spots, he said.
Cold spots are markets outside the traditional peak exposure zones of US quake and hurricane, Japanese quake and typhoon and European windstorm.
There was an increase in demand for global reinsurance cover at the renewal, said Mr Flandro. The flooding in Thailand showed insurers with overseas exposures the potential for big losses in catastrophe cold spots.
As a result, multinational insurers are looking to buy more reinsurance protection and higher limits in cold spot regions, said Mr Flandro. But such cover now comes at a price, he added.
The renewal also saw reinsurance contracts renew for insurers in other Asian countries, including India and Korea. Both countries experienced increases in rates and restrictions in cover at the April renewal, as reinsurers responded to the losses in Thailand, said Maurice Williams, Managing Director, Asia Pacific, Middle East, Turkey & Africa for Willis Re.
The April renewal, with its focus on growing markets in Asia, is becoming more important to the global reinsurance market. “The region’s reinsurance markets are growing in importance with economic growth and insurance penetration and as buyers are becoming more sophisticated,” said Mr Flandro.
However, with big losses in Japan, Thailand, Australia and New Zealand in 2011, the global reinsurance market is putting Asia under more scrutiny, he said. “There has been a general market hardening in Asia,” he explained.
Reinsurers were caught out by last year’s flooding in Thailand, said Mr Williams. As a result, reinsurers punished Asian countries at the January and April renewals. While there was an element of payback in Japan at the April renewal, other Asian markets face a period of more rigorous underwriting, he said.
“Any insurer with Asian business found that the price of capacity had gone up significantly for territories and perils that are not adequately modelled,” he said. “The uncertainty premium was turned up substantially and the market hardened for these exposures.”
In particular, the retrocession reinsurance market for regional reinsurers has substantially hardened, said Mr Williams. They faced higher rates and restrictions at the January 1 renewal and this appears to be continuing for those with renewal dates of May 1, he said.
Regional reinsurers that have been dependent on retro capacity are no longer chasing business and are not prepared to wage a price war, said Mr Williams. These price increases are now filtering down to the region’s insurers, he said.
“Depending on global capacity, it is likely to be a slow process before reinsurance prices in Asia stabilise and then fall. There is a surplus of capacity globally, but that is not being directed at areas of pricing pressure—including Asian natural catastrophe exposures previously seen as having been under-priced,” said Mr Williams.
The full version of this story can be found in the May issue of Commercial Risk Europe's newspaper.