Sleepless In Monte Carlo?
A storm loss the magnitude of Hurricane Katrina is bound to keep reinsurance leaders up at night–particularly in light of how the situation plays out compared to last year.
With the Rendez-Vous de Septembre coming up in Monte Carlo, I wondered how the industry would hold up against the onslaught of billions in claims from Hurricane Katrina–particularly how the already battered global reinsurance sector would fare.
"What's keeping reinsurers up at night? It's probably that they've had one huge hit and the season's not over yet," said Mark Rouck, senior insurance analyst with Fitch Ratings, who noted that with Katrina, reinsurers "stand to be hurt more by this event than they were by the four events last year."
In 2004, a grand slam of hurricanes hit the United States, causing more than $20 billion in insured losses. However, while Katrina is just a single storm, reinsurers likely will take on a larger burden than they did last year.
The reason is that last year's hurricanes were four separate events, meaning insurers absorbed four individual retentions, depending on the coverage, before filing claims with their reinsurers on any one loss. This year, however, insurers only have to clear one retention level before tapping their reinsurers.
This is no surprise, as primary companies buy reinsurance just for "an event like Katrina," noted Mr. Rouck. "They're trying to protect against the doomsday scenario."
In other words, welcome to "doomsday."
The only positive development–for sellers, not buyers, that is–that might come out of this most recent disaster is that it will provide support for future hikes in premiums for catastrophe-exposed areas. That was certainly the case after the grand slam of storms that hit the U.S. mainland last year, noted Mr. Rouck.
However, the softening market beyond property-catastrophe was not affected last year by the hurricanes, and that is likely to be the case with Katrina as well, analysts say.
Fortunately for reinsurers, analysts note, Katrina comes at a time when a significant amount of new capital has already been built up and the industry has a couple of profitable years under its belt. This is in contrast to what happened after Sept. 11, 2001. At that time the reinsurance industry was already suffering, and 9/11 "was the last nail in the coffin," Mr. Rouck said.
Meanwhile, Fitch has noticed an interesting trend in capacity–a "convergence between the relative strengths and weaknesses" of old and relatively new companies. Mr. Rouck noted that in the last few years there was a rush of "clean capital," which had no legacy reserve issues, into the industry. The negative was that these companies had no track record.
On the flip side were mature reinsurers with concerns about reserve adequacy. But differences between the two sectors have begun to blur as the start-ups have built up a track record, their books have matured, and they have diversified their risks.
Here at National Underwriter, beyond the initial shock and horror over the devastation caused by Hurricane Katrina, our thoughts turned to those in the industry who will be helping the survivors rebuild their communities. Processing so many claims amidst such massive destruction will not be easy, but as in past disasters, we're confident adjusters, agents and carriers will rise to the occasion. This is what the insurance industry does best.
In any case, there will be plenty for everyone to ruminate about in Monte Carlo into the wee hours of the night. Ambien, anyone?
Caroline McDonald
Senior Editor
"Processing so many claims amidst such massive destruction will not be easy, but as in past disasters, we're confident adjusters, agents and carriers will rise to the occasion. This is what the insurance industry does best."
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