NU Online News Service, March 8, 3:25 p.m. EST
Chile earthquake losses sustained by that nation's insurers and reinsurers should be manageable, according to Moody's Investors Service.
The rating firm in its Weekly Credit Outlook noted that Chilean insurers use extensive reinsurance to keep their net loss retentions at relatively low levels in order to protect their solvency margins.
In an analysis written by Rodolfo Nobrega, vice president-senior analyst, the firm said the Chilean insurance and reinsurance industry will handle considerable exposure.
It noted that modeling firms estimate insured losses of $2-to-$8 billion, while the Chilean Insurance Association estimates $2.6 billion.
"Insurers' profitability will be pressured by these losses, which are largely driven by an increase in overall loss ratios, as well as by the need to replenish catastrophe reserves," Moody's found.
However, the rating firm said it expects overall insured losses to local insurers should be limited as a result of their well-established risk-transfer arrangements and catastrophe-protection tools, as well as the mandated earthquake reserves set aside by all property and casualty insurers.
"These advantages enable domestic insurers to sustain and fund certain levels of catastrophe losses without a direct impact on their earnings or capital," wrote Mr. Nobrega.
Moody's said awareness of a high loss risk by the Chilean population and businesses has led to increased utilization of earthquake insurance protection and also to greater penetration by the local insurance market in the economy.
Insurance premium penetration in Chile was put at 4 percent of gross domestic product. Although this level is above other major markets in the region, it remains well below more developed economies, which will also limit insured losses, said Moody's.
The firm reported that with the large amount of reinsurance protection purchased and the potential size of the catastrophe, it already seems likely that reinsurers will shoulder the majority of insured losses from the Chilean earthquake.
This will be true, Moody's said, notwithstanding the fact that reinsured earthquake losses are notoriously difficult to estimate early on, and that no estimated losses have been forthcoming from reinsurers to-date.
Even if insured losses are at the top end of modeling firms' current range, the report said Moody's believes the majority of reinsurers should be able to "comfortably absorb incurred losses within their first- quarter earnings."
However, the company said it is possible that one or two players, as a result of significant market share and/or mismanagement of aggregate exposures, may suffer an overall first-quarter loss, but even here, any impact on capital should be limited.
The Chile earthquake, Moody's said, is not seen as a "market-turning event" from a pricing perspective, although it may give pause to some reinsurers that are contemplating share buy-backs. Global reinsurance capacity should be relatively unaffected, with the general downward pressure on reinsurance rates likely to continue, the company concluded.
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