With billions in property losses expected in the aftermath of the earthquake and tsunami in Japan, will the property and casualty insurance market be able to absorb the claims? In the aftermath of any major catastrophe, insurers rely heavily on both reinsurance (insurance for insurers) and their reserves to pay the claims for the policies they hold. An interesting new study from Stifel Nicolaus, a Financial Services and Investment firm examines the impact of the earthquake in the global reinsurance market.
From Stifel Nicolaus:
• The 8.9M earthquake that hit Japan last Friday will likely have an impact on the (re)insurance industry, particularly on companies that have been diversifying their CAT exposure outside of the peak zone of U.S. wind. However, the Japanese insurance sector is a little distinct in that much of the risk has been kept “in house” – through a government-sponsored catastrophe reinsurance program.
• We believe, regardless of what the ultimate insured losses will be in Japan, it will certainly change pricing in the Asian and Australian region. Moreover, the confluence of all the many severe catastrophic events in the past year – accentuated by the recent Japan quake – should raise the overall stature of risk potential worldwide.
• It is difficult to determine exactly what the exposures would be for our Bermuda company universe since some of the catastrophe exposures would emanate from Bermuda as premiums but the exposures could be in Japan. Moreover, many companies tend to aggregate all Asian exposures, including Japan.
• Any knee-jerk pullback in the names as a result of the Japan losses will likely be made up very quickly – except for any companies that will be perceived to be capital constrained as a result of all the recent losses.
It remains to be seen what the long term effects of the earthquake on reinsurance market will be, but the capacity of reinsurance to withstand events like hurricanes and earthquakes is well established. So long as insurers are allowed to manage their risk and spread it globally, many of the claims in Japan should be paid without too many problems.
“Most reinsurers have described the overall global catastrophe reinsurance marketplace as the more stable of all the sectors of the property/casualty industry – with U.S. wind almost unanimously mentioned as the MOST stable in terms of pricing for property and cat reinsurance. That means, by definition, that the non-U.S. wind sector had been under at east a little more pressure from a pricing perspective. We believe that these aggregate cat events will add more stability to the non U.S. market, meaning the overall global reinsurance market will likely be better priced for the next year – perhaps a “head fake” harder market as we call it.”