The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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2011 may well be remembered as the year of international catastrophes. From Australia to New Zealand (twice), to Japan and now to Thailand, international cats have smashed (re)insurers on an unprecedented scale.

And for US primary insurers, 2011 will be remembered as the year of the tornado. An unprecedented wave of severe storms and tornadoes swept across parts of the US during April and June, causing devastation on a huge scale.

During the period, more than five insured events in excess of $1bn occurred. To give a sense of the unprecedented nature of the events, this year has seen the deadliest single tornado and the most deadly tornado season in over 50 years, as well as the largest number of tornados in both a single day and in a month, according to data from global reinsurer Munich Re (see box-out).

First-half severe storms alone caused an aggregate industry claims bill of $16.4bn, says Munich Re. By way of comparison, only hurricanes Katrina ($62.2bn), Ike ($18.5bn) and Andrew ($17bn) cost the industry more, if considered as a "single event".

But despite the colossal scale of the losses, the global reinsurance industry has not been obsessing over news from the US in the same way that its attentions have been focused on loss developments in the Asia Pacific region.

Click to enlarge This can be explained by the fact that the majority of the claims burden has fallen on the giant US primary underwriters - the likes of Allstate, Travelers and Chubb.

The primary writers have tended to take the impact of these events net as a result of the trend in recent years for carriers, bolstered by growing capital and surplus bases, to increase retentions and move from proportional to non-proportional reinsurance. As such, the events have been of less concern to international reinsurers.

Even so, there has been some modest suggestion of "tornado creep" in the sector during the Q3 reporting season, including adverse developments for Bermudians Montpelier Re and Aspen, and Switzerland-based Allied World (see table). A number of reinsurers have also confirmed that they have booked losses from aggregate property reinsurance contracts written for US regional companies, including Axis Capital, Argo, RenaissanceRe and Endurance.

Meanwhile, the (re)insurance sector's annual test of nerves, otherwise known as the Atlantic windstorm season, came and went without triggering a major loss as some had feared.

Though Hurricane Irene broke a two-year streak of no hurricanes making landfall when it struck North Carolina on 27 August, the storm passed across some potential peak risk areas, such as New York, without bringing the industry to its knees.

Irene may have huffed and puffed but it didn't blow many homes away. And while it and its successor, Tropical Storm Lee in September, caused extensive flood damage across the Eastern Seaboard, a lot of these losses will be borne by the state-run National Flood Insurance Program.

Nevertheless, primary insurers again took a pretty heavy beating. Chartis ($372mn Irene; $80mn Lee), Allstate ($1.1bn Q3 cat losses), Travelers ($606mn Q3 cat losses, predominantly Irene and Lee) and Chubb ($410mn Q3 cat losses) all saw results adversely affected. Of the bunch, Allstate has perhaps paid the heaviest price, with rating agency Standard & Poor's putting its A- counterparty credit risk on negative outlook after it racked up a heavy $3.7bn cat bill during 2011 to date, along with concerns over its capital management strategy and acquisition of Esurance and Answer Financial.

Such a string of frequency catastrophe losses, as well as others including winter storms and wildfires, are causing a rethink within the primary industry on retention levels and ways to protect earnings through purchasing greater sideways protection, according to industry sources.