The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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2010 started explosively for the facultative reinsurance market, with February's earthquake in Chile a local disaster that soon turned out to be a source of substantial claims for direct and facultative (D&F) writers.

Although the epicentre of the earthquake avoided the main mining region in the north of the country, it caused considerable damage to local industrial facilities. Pulp and paper mill producers were heavily impacted in particular - and constitute a significant component of Chile's national economy with an 8 percent global share of output.

Major producers such as Empresas CMPC, Arauco and Norske Skog all have operations in the Maule and Bío Bío regions that were most affected by the quake, with several operations suspended.

Two of Arauco's paper plants are located near the epicentre of the quake: the 355,000 tonnes per year unbleached kraft pulp Constitución mill in the Maule region, and the 1.03mn tonnes per year bleached softwood kraft (BSK) and bleached hardwood kraft (BHK) pulp Nueva Aldea unit in the Bío Bío region.

Of course, the impact to the D&F market in Chile was compounded by low primary insurer retentions, the high proportion of facultatively reinsured production facilities and buildings, and the ongoing business interruption losses.

"While Chile dominated the D&F loss environment, the stand-out claim was April's explosion at the Deepwater Horizon platform in the Gulf of Mexico"

One of the problems with the Chilean earthquake was the lack of reliable information in the weeks immediately after the event, making accurate damage estimates difficult. The situation had still not sufficiently improved by the summer, prompting Lloyd's to send a claims delegation to the country to gain a fuller picture of estimated losses.

Creeping up
Nonetheless, the scale was such that by June industry declared losses from the Chile earthquake had reached $6.5bn, with a number of players continuing to revise their estimates upwards. Swiss Re increased its estimate from $500mn to $630mn in June, while Munich Re also increased its Chile loss estimate after retrocession and before tax from $700mn to $1bn, on a market loss estimate that had by then climbed to $8bn from $4bn-$7bn.

Click to enlarge Offering an example of the scale of the damage, the number of individual losses was also very high for Munich Re, with local insurance companies receiving more than 190,000 claims notifications by the end of April alone.

UK insurer RSA experienced one of the biggest gross impacts from Chile, as in August it disclosed a £1.2bn gross loss on the earthquake disaster as part of its first-half results. The insurer's losses are believed to be split between the global portfolio written by its London market division and the local market portfolio of its subsidiary Royal & Sun Alliance Seguros Chile. Its level of reinsurance coverage is typical for the region, where around 90 percent of direct premium written is ceded to foreign reinsurers, according to Chilean regulator the Superintendencia de Valores y Seguros de Chile.

Naturally, a key question is whether Chilean claims are likely to increase further. One cannot say for certain, of course, but given third quarter reporting it at least looks as if some sort of stability has been achieved, with most (re)insurers maintaining the levels of their loss estimates at previously declared levels, while some have actually slightly decreased their figures. Lloyd's (re)insurer Hardy, for example, said its picture has improved slightly, with the firm reducing its reserve for the earthquake by $2.5mn to $27.5mn.

Deepwater blowout
While Chile may have dominated the D&F loss environment for the year to date, the stand-out claim for 2010 was of course April's explosion and blowout at the Deepwater Horizon drilling platform in the Macondo ridge in the Gulf of Mexico. The event has generated extensive media coverage as a result of its potential environmental impact on the US.

Total claims, once liability issues have been factored in, could go as high as $3.5bn, according to Swiss Re. Lloyd's estimates its net claims from Deepwater at around $300mn to $600mn, while Hannover Re recently more than doubled its estimated hit to EUR89mn from a EUR40mn.

Another significant event for the D&F market is May's rioting in Bangkok, which seems likely to cost the property and terrorism markets dear. Loss estimates suggest a total market loss of $1bn. The bulk of this stems from the $500mn programme for the Central World shopping mall.

Other stand out-losses include the $150mn Kleen Energy factory explosion in February and the Massey Energy explosion on 5 April, with property cover of $50mn.

US oil pipeline ruptures have been a challenge for the casualty market in 2010. In its third-quarter filing, Calgary-based Enbridge Energy Partners said it was expecting a $491mn all-in loss from pipeline ruptures this year, including a spill in July that released an estimated 819,000 gallons into a Lake Michigan tributary.

The spill occurred on Line 6B of the Lakehead System on 26 July when a 30-inch pipeline ruptured near Marshall, dumping hundreds of thousands of gallons of oil into the Kalamazoo River and other waterways.

More recently, on 9 September, Enbridge reported another pipeline leak in the Midwest - this time on Line 6A of the Lakehead System in Romeoville, Illinois. An estimated 2,000 gallons of oil leaked into a storm retention pond and wastewater treatment plant before the pipeline was shut down.

Kiwi shake
However, the earthquake that struck New Zealand on 4 September is one sizeable market loss not expected to cause significant losses to D&F writers,. Total (re)insured losses from the quake could nonetheless reach $2bn-$4.5bn, according to modelling firm AIR Worldwide. Importantly for D&F writers, there have been few reported major individual property losses. One of the biggest fac accounts in the region is dairy giant Fonterra, although the market is not expecting any sizeable claims in relation to the programme.

Despite New Zealand, it is clear that, as regards man-made losses, 2010 has continued the pattern of recent years, with the market absorbing substantial claims that have impacted the bottom line.

According to Mike Papworth, head of facultative at Miller Insurance, the interesting thing about the 2010 claims experience for many underwriters is the volume of smaller, attritional losses, which has been such that the he expects combined ratios for the year to climb over 100 per cent. He adds that a useful comparison year is 1999, when the combination of a soft market and mounting smaller losses meant that combined ratios were similarly unhealthy.

And all of this, of course, without a major US hurricane hitting this year. It's clear that the claims experience for fac writers is not getting any easier.

Click to enlarge