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Less than three months into 2011, some of the world's largest reinsurance companies have already used up their natural catastrophes budget, or money they've set aside to pay for huge claims from natural catastrophes such as floods, hurricanes or earthquakes.
Even before the powerful 8.9 magnitude earthquake that hit Japan on Friday added to their losses, claims from winter storms in the U.S., floods in Australia and a severe earthquake in New Zealand amounted to more than companies like Munich Re or Swiss Re, the world's number one and two reinsurers, had put aside for the entire year.
And bear in mind that the hurricane season, during which in the recent past the most expensive catastrophes happened, is still months away.
Hurricane Katrina, which hit New Orleans in 2005 was the costliest event ever for the industry at $71 billion. It's followed by Hurricane Andrew, which hit the U.S. in 1992 and cost the industry some $25 billion
With tsunami warnings still in place for much of the north of the country into Friday night, neither the Japanese government nor insurers were able to provide estimates of the losses. To offer some guidance, remember that the Kobe earthquake in January 1995, which claimed 6,425 lives, cost the insurance industry $3.48 billion.
Shares of European insurers plunged in a knee-jerk reaction to the prospects of huge losses in Japan.
Those of reinsurance companies, which act as insurers of last resort for insurers, were hit particularly hard.
That's because reinsurers will be taking the bulk of the losses. After all, their purpose of existence is exactly that, offer protection to primary insurance when rare but very costly events occur.
The sell-off is understandable as a presumably very costly event like today's earthquake will surely cut deep into reinsurer's profits this year. But longer-term, the quake may prove to be the long-awaited turning point for the reinsurance industry.
Reinsurers have been suffering for many years from low, if not declining, prices for the cover they're provided.
There are two key reasons why reinsurers have been unable to lift prices. For one, there is too much competition. Hurricane Katrina, the most recent costly event, is almost six years in the past.
During those years, existing companies have accumulated capital (and not too much of it was wiped out during the financial crisis) and newcomers have tried their luck.
Especially, the newcomers have been trying to win market share by offering protection at cut-throat tariffs, established companies claim. The absence of costly natural disasters has also diminished demand for reinsurance cover, which added more pressure on prices.
For this year, most contracts between reinsurers and their clients, primary insurers, have already been renewed in January. So it will take almost another year, until companies like Munich Re and Swiss Re can lift prices.
But even if 2011 doesn't continue to be as bad a year as it's been so far in terms of natural catastrophes, prices for reinsurance cover will surely rise in 2012.
Note: Loss estimates of past catastrophes by Swiss Re. Link: http://media.swissre.com/documents/F_20051.pdf
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sick investors who oull there investments out of insurance when natural disasters hit poor poor people or japan. shame on you
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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