Two-Year Drop in Reinsurance Rates May End After Japan Earthquake Losses

Insurance losses from the Japanese earthquake may be large enough to turn prices for catastrophe cover that have been falling for two years, according to analysts, brokers and underwriters.

Insurers and reinsurers face claims of as much as 2.8 trillion yen ($34 billion) tied to the 9.0-magnitude quake on March 11, excluding damage caused by the tsunami, catastrophe modeler AIR Worldwide estimated. That would follow about $20 billion in losses from four previous disasters in the Asia- Pacific region, based on projections by Guy Carpenter & Co.

“The Japanese quake finally exhausts the natural catastrophe budget for 2011 of a majority of reinsurance companies,” said Fabrizio Croce, a Zurich-based analyst with Kepler Capital Markets. “All the ingredients for market hardening are now perfect.”

In reinsurance terms, a hardening of markets or rates refers to an increase in prices for coverage. Reinsurers such as Munich Re and Swiss Reinsurance Co., the world’s biggest, renew about two-thirds of their annual property and casualty contracts in January, and the remainder in April and July. The renewals on April 1 typically focus on the Asia-Pacific region.

More than 10,000 people may have been killed by the Japan quake, which hurled a 7-meter (23-foot) wave landward after one undersea plate slid beneath another off the coast of Sendai. The country is battling to prevent a nuclear meltdown after blasts rocked an atomic plant north of Tokyo.

Hurricane Katrina

Based on AIR Worldwide’s preliminary estimate, the quake would be the second-most costly disaster for insurers and reinsurers after Hurricane Katrina in 2005. The hurricane cost the industry $62.2 billion, not accounting for inflation, according to estimates from Munich Re.

The quake in Japan “comes ahead of the Asian reinsurance renewals, so there may be payback for this loss,” said Ben Cohen, a London-based analyst with Collins Stewart.

The Stoxx Europe 600 Insurance Index slid 3.3 percent to 160.65 as of 10:22 a.m. Frankfurt time today, following a 4.2 percent drop in the previous two days. Declines have been led by reinsurers, which help protect primary carriers such as Allianz SE (ALV) and Axa SA (CS) against the cost of major claims from disasters such as hurricanes and earthquakes. Hannover Re, Swiss Re and Catlin Group Ltd. (CGL) have all tumbled more than 10 percent following the quake.

Previous Disasters

Reinsurance rates fell for a second straight year in January on high levels of capital available in the industry, according to Guy Carpenter, the reinsurance brokerage of New York-based Marsh & McLennan Cos.

Insurers and reinsurers were hit before the Japan quake by four disasters in the Asia Pacific region -- two temblors that struck New Zealand as well as Cyclone Yasi and floods, which both hit Australia, said David Flandro, London-based head of global business intelligence at Guy Carpenter.

“These claims have exceeded a large portion if not all of the natural catastrophe budgets set aside by reinsurers, making the Japanese catastrophe a capital event as well as an earnings event for reinsurers,” he said in a phone interview.

In 2008, Hurricane Ike slammed into Texas in September, costing the insurance industry $18.5 billion and helping push up reinsurance rates by about 8 percent following a two-year decline. After the 2005 hurricane season, rates measured by the Guy Carpenter Global Property Catastrophe Rate on Line Index rose to their highest since 1994.

‘Market-Moving Event’

The Japan quake “is probably a market-moving event,” said David Carson, head of property treaty at Hardy Underwriting Bermuda Ltd (HDU), a Lloyd’s of London insurer. “The culmination of losses in the international market over the past year means this is the tipping point. A month ago Japanese clients were looking for 5 percent to 10 percent reductions, now it looks as if prices will rise globally.”

Patrick Hartigan, head of treaty reinsurance at Beazley Plc (BEZ), the fifth-biggest publicly traded Lloyd’s insurer by market value, said his company will negotiate with clients before the April 1 Japan renewals.

“It will undoubtedly have an effect on international catastrophe rates,” he said. “We have to wait and see how the losses from this event and New Zealand last month pan out.”

Lloyd’s of London, the world’s largest insurance market, said it’s too early to put a figure on industry losses from the earthquake. “Lloyd’s routinely stress tests individual syndicates and the market as a whole for large-scale natural catastrophes of this nature and we are confident the market can respond to any claims in the normal course of business,” it said in a statement.

‘In Disarray’

Aon Benfield, the reinsurance brokerage of Aon Corp. (AON), declined to give a price estimate, also saying it’s too early, according to spokeswoman Alexandra Lewis. Broker Willis Group Holdings Plc (WSH) is working with its reinsurance clients to evaluate the losses, President Grahame Millwater said in a phone interview from London. “The market may move, definitely in some segments, but it is much too early to tell,” he said.

“The April 1 Japan reinsurance renewal season is in disarray,” Barclays Capital analysts including Jay Gelb and Sarah Dewitt wrote in a March 14 research note. “We anticipate Asia/Japan property reinsurance rates will climb as a result of increased demand for coverage and capacity constraints. The impact on the rest of the global property reinsurance market is less clear.”

To contact the reporters on this story: Oliver Suess in Munich Bureau at osuess@bloomberg.net; Kevin Crowley in London at kcrowley1@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.