Long gone are the days when we could watch the economy in other continents suffer while we sat immune.
January reinsurance renewals exposed concerns about the transparency of underwriting risks following a year in which substantial Asia-Pacific catastrophe losses came from exposures or regions where potential risks were not adequately understood.
About 70% of the global economic losses of US$380 billion from natural catastrophes in 2011 occurred in Asia. The events' impact on reinsurers has been tremendous, said Tobias Farny, chief executive of greater China and Southeast Asia at Munich Re.
One lesson from the events was the lack of transparency for exposure limits and adequacy of programs and pricing, according to Farny. Thailand was not a peak catastrophe region but the recent floods and subsequent business interruption damage to global supply chains revealed a vast scope of risks not previously considered.
"Everyone is eager to better understand what the exposures really are," said Farny. Given the extent of losses related to the Thailand floods, pricing is not up to the level for technical needs. It is now recognized even for loss-free years that pricing levels had not been enough to underwrite such exposure.
A significant trend for the 2011 January reinsurance renewals was the "cold spots" phenomenon, which refers to exposures that were inadequately modeled and where the severity of losses was unexpected, according to a report by reinsurance intermediary Guy Carpenter & Co. These cold spots involved hits to globalized economic activity in unanticipated ways, including supply chain disruptions caused by the March 11 earthquake and tsunami in Japan and floods in Thailand.
In the January 2012 reinsurance renewals, Farny noted some clients looked closer at the capital strength of reinsurers. It became more difficult to get full placement of treaties, particularly for those with heavy catastrophe exposure. Some reinsurers found also it harder to get retrocession coverage, especially for natural catastrophes.
With global insured catastrophe losses in excess of US$100 billion in 2011, more than 50% of the amount will be borne by reinsurance market. "Reinsurers are taking stronger actions to control and/or limit their exposure to surprise losses, such as the Thailand flood, by either demanding far greater transparency of data, or alternatively by sub-limiting their exposures to manageable levels," said intermediary Willis Re in a report.
Last year's events outlined the limitations of the current understanding of natural catastrophes. "This realization has led some reinsurers to question the benefits of diversification, which is leading to capacity constraints in second- and third-tier catastrophe-exposed territories," said Willis Re.
Natural catastrophe was on top of the agenda for January renewals discussions, said Farny.
Reinsurers are looking cautiously at their portfolios and accumulated risks. Some reinsurers have to reduce their risk appetite to some extent or entirely on natural catastrophes with more balanced portfolios. Farny said Munich Re is offering the same level of capacity for the region as last year.
Thailand, which was not previously considered a peak risk area, was hit by severe flooding last year with estimated insured losses of US$15 billion. Several Bermuda-based reinsurers recently reported significant losses related to the floods, with significant impacts on 2011 earnings.
Reinsurance capacity has left the Thailand market and pricing has increased, according to Farny. Most importantly, discussion focuses on the transparency issue on definition of events and limitations. Thailand was not considered to be highly prone to natural perils, but the recent floods were notable for the "sheer size" of damage to global supply chains, due to the concentration of manufacturing facilities in the stricken areas.
The Thailand flooding was the second-largest natural catastrophe in terms of overall losses in 2011, following Japan'sMarch 11 earthquake and tsunami, according to Munich Re.
The event has led to discussions on dealing with catastrophe events with such immense impacts in global markets, noted Farny.
"Insured and reinsured losses from New Zealand, Japan and Thailand continued to creep upwards — a drip-feed of worsening news that carried out into the beginning of the renewal season," said Willis Re. The impacts of these losses were felt globally, but hit the Asia-Pacific regional reinsurance markets particularly hard.
Average rates in the catastrophe-hit Asia-Pacific markets were up significantly, but within a very wide range, according to Guy Carpenter, as 2011 was the second-biggest year for large catastrophe losses on record.
Generally, Farny said there has been an upward pricing trend and loss-free areas have also experienced some rate hikes. In Thailand, rates were up 50% or more.
Large payouts for natural catastrophe losses, along with growth in markets such as China, are driving the need for capital in the industry, according to Farny. As part of their capital management, more primary insurers have been looking to reinsurance to strengthen their solvency position.
From a capital perspective, global reinsurers "are well-capitalized and capable of absorbing significant losses from a combination of events," said A.M. Best Co. in its 2012 reinsurance outlook report.
Recent events such as global catastrophes, increased volatility of assets and updated catastrophe models have brought about a change in primary insurers' perception of risks. "This increased awareness of risk, combined with growing regulatory pressures on solvency margins, appears to have turned the tide on demand for reinsurance, especially in loss-prone regions of the world," said A.M. Best.
Overall, A.M. Best said "this increasing demand for reinsurance cover has helped to bolster current pricing for property catastrophe-related business."
Asian countries are moving toward solvency regimes, with regulators implementing solvency-based measures, said Farny. For catastrophe risks, some governments are looking to the establishment of catastrophe funds. Thailand'sOffice of Insurance Commission plans to set up a 50 billion baht (US$1.6 billion) catastrophe fund to provide insurance coverage for floods, windstorms and earthquakes.
Listen to the interview with Farny at http://www.ambest.com/media/MA.asp?lid=latestaudio&vid=farny212
(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)