Carriers Warned To Buy More Catastrophe Coverage
London
Some primary insurers might not be buying enough reinsurance to protect themselves from the large catastrophes that can be expected to occur every 100 years and upwards, a Swiss Re executive has warned.
"From our studies, it doesnt appear as though the insurance industry as a whole buys adequate protection for the more severe events," said Andy Castaldi, head of catastrophe perils with Swiss Reinsurance Company in Armonk, N.Y.
"One of the things thats always been surprising to us is that theyre not adequately covering themselves for the big event, the nightmare event, that might happen every 300 years," said Mr. Castaldi. Many insurers might be protecting themselves instead for the more frequent event, which might happen once every 30-to-50 years, he added.
While this is a problem affecting insurers around the globe, he said, just looking at the United States, insurers are inadequately covered for the New Madrid fault in the Midwest, Southeast windstorms, and California earthquakes.
Taking into account all relief provided by proportional and non-proportional coverages, the U.S. industry would have to bear 50 percent of the loss themselves, estimated Gerry Lemcke, deputy head of catastrophe perils with Swiss Re.
Mr. Castaldi said this would include the amount that insurers would have to absorb themselves–above their exhausted catastrophe layers.
"For 2002, the reinsurance market attaches when the market loss hits $8 billion, and the non-proportional covers are exhausted at $32 billion," Mr. Lemcke said. After $32 billion is exhausted, it falls back on the insurers again, he said.
Mr. Castaldi is less concerned about insolvencies than he is about how it might affect the ability of the insurance industry to conduct business the way it would like after an event. "Anything that will reduce surplus by that tremendous amount is going to cause some type of market dislocation," he said.
When a $100 billion earthquake moves from an insurers event to a reinsurers event, then back to an insurers event, the industry probably has enough surplus to handle that size of loss, but individual companies might not have the ability to continue doing business unless they find additional ways of raising capital, he said.
"From an industry perspective, there is adequate insurance and theres adequate reinsurance to cover those losses," he said, noting that regulators and rating agencies track the amount of reinsurance purchased for large catastrophe events.
There will be a couple of companies that arent prepared well, but "I would be hesitant to say that it will be a doom and gloom scenario for the industry or create a major insolvency issue."
Mr. Castaldi admitted that some insurers are probably opting not to buy coverage for the 250-year event of $100 billion due to the expense. They are probably deciding that it might be more affordable to assume the risk themselves, he said.
"However, there is definitely a risk and its worth some premium," he said. "People purchase reinsurance to protect their assets and shareholders equity, which is especially an issue in todays climate."
Mr. Castaldi emphasized that the large 200-to-250-year loss wont affect the responsible reinsurers. "Thats our business. Were planning for that," he said, noting that Swiss Re was the largest reinsurer providing coverage for the San Francisco earthquake in 1906.
"Reinsurers are fully prepared to take on additional cat risk, as long as there is some type of adequate return to compensate for that," he said.
Mr. Castaldi said that when people complain about reinsurance prices, he is quick to remind them that rates are only now approaching adequacy. "Rates are just starting to come up to the levels they should be," he contends.
Catastrophe losses dont happen every year, he said, "but you know theyre going to happen over 20 years, so you should be collecting adequate premium in each of those years to eventually compensate for when you do have that big loss."
Mr. Castaldi said that inadequate purchases of catastrophe coverage is also a problem among buyers of insurance, particularly in the area of earthquakes. Most insureds dont buy coverage up to the maximum value of their home, he added.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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