The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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Reinsurers' bill for February's earthquake in New Zealand is likely to run into the billions, which they will be forced to pay on top of hefty prior losses on the first Christchurch quake and the Australian floods.

Overall insurance industry losses from the two earthquakes and the slew of Australian cats is likely to significantly exceed $10bn.

Bottom-up analysis from IQ shows that the combined impact of these events is likely to be more than $7.5bn.

Reported reinsurance industry losses from September's Christchurch earthquake are almost $2.3bn and reinsurers have already notified the markets that they have reserved $3bn for the Australian cats, with more losses on the way.

A senior underwriting source told sister title The Insurance Insider that the industry is working on the assumption that losses from February's seismic event will be of a similar magnitude to the one that hit around six months ago.

And analyst Tom Dorner also endorsed the view that the loss figures from September could be used provisionally as a "proxy" for reported loss numbers, although he warned that reinsurers may have altered their exposure at 1 January.

This would suggest a bottom-up loss estimate of $2.3bn, again.

However, analysis of this sort is notorious for understating loss figures. And preliminary top-down analysis of the quake from cat modelling firm AIR Worldwide suggested punishing losses of between $3.5bn (NZ$5bn) and $8bn (NZ$11.5bn).

This would be a substantially bigger event in insurance terms than September's earthquake.

Aon Benfield, which brokers the biggest reinsurance contract out of New Zealand, puts the total losses for that event at $3.05bn. Munich Re is assuming a loss range of $3bn-$5bn, while PartnerRe suggested that it could go as high as $5.5bn.

Taking a $4bn estimate for the September quake and the mid-point of the AIR range at $5.75bn suggests that losses will be 44 percent heavier for the second event.

A 44 percent increase on the September 2010 loss would total the government pool's reinsurance programme, which has NZ$3.5bn of reinsurance in excess of NZ$500mn that it reinstated after the first catastrophe.

IAG had told its reinsurers that its gross losses will probably come to NZ$919mn, while Suncorp specified $558mn and local insurer AMI said it was looking at $425mn of claims.

If these numbers are given the same weighting as the New Zealand Earthquake Commi Click to enlarge ssion loss figures then NZ$1.3bn emerges for IAG, NZ$800mn for Suncorp and NZ$610mn for AMI.

IAG, Suncorp and AMI all have significant cat reinsurance programmes. IAG buys A$4.1bn in excess of A$200mn, but it supplements this with both three-year retention buy-down cover and aggregate cover.

Suncorp can call on a A$5.4bn in excess of A$200mn programme and aggregate cover that could take its ultimate retention as low as A$10mn.

AMI has a reinsurance programme with NZ$500mn cover above an unknown retention. The inception date and reinstatement provisions are not known either.

Top-down estimates for Australia losses include Transatlantic Re's provisional A$3bn-A$5bn estimate and a slightly scattergun prediction of A$5bn-A$10bn from Chubb. The Insurance Council of Australia currently estimates general insurance claims at A$3.1bn.

Considerable uncertainty still surrounds the Australian losses due to complications with multiple events and cover renewals at 1 January.

In particular, there is still quite limited available information on the Q1 flooding losses and even less that is specific to Cyclone Yasi, which hit in February.

It does not seem likely that by the end of this (re)insurers that have gone Down Under will have gone under. But this is a painful series of losses for the international property cat market and its underwriters are unlikely to draw much comfort from the continuing benignity of the cat environment in the US.