Posted on May 16, 2011 by Sergio Ulloa
Lloyd's of London, the world's oldest specialist insurance market, has revealed that losses from this year's earthquakes in Japan and New Zealand, and floods in Australia will cost its members about US$3.8 billion, making it the costliest first quarter on record. Lloyd's further warned that the cost of insurance worldwide is likely to rise as a result of these devastating catastrophes on the insurance industry.
In a statement on Friday, Lloyd's calculated that the March 11 Japanese earthquake and tsunami
alone generated estimated net pre-tax claims of US$1.95 billion, making it the fourth-largest single loss in the market's history. Only the US$4.3 billion and US$2.1 billion in insured losses from Hurricanes Katrina and Ike in 2005 and 2008, and the US$3 billion lost from the terrorist attacks on September 11th in the United States were costlier, according to Lloyd's.
Lloyd's members declared that a further US$1.2 billion in claims may result from the New Zealand earthquake and insured loss estimates for the severe flooding in Australia were about US$650 million in total.
Lloyd's published the estimated losses after its 87 competing syndicates, which underwrite insurance risks in over 200 countries, submitted their maximum exposure to the three catastrophic events in the Asia Pacific region. Lloyd's maintained that their claims were consistent with the cumulative projected industry losses of US$30 billion in Japan, US$ 9 billion for the New Zealand earthquake and US$5 billion in regards to the unprecedented Australian floods.
The estimated catastrophe losses for the first three months of 2011 have exceeded the US$2.6 billion Lloyd's paid out for the entirety of 2010, a year which featured higher-than-average catastrophes including the earthquake in Chile and the Gulf of Mexico oil spill.
Industry analysts have commented that first quarter catastrophes may slash full-year profit for Lloyd's insurers by up to 70 percent. The market's insurers have already encountered extensive claims, even though they traditionally face their biggest losses during the second half of the year during the height of the United States hurricane season.
Despite the high volume of claims, Lloyd's asserted that "there will not be a material impact on Lloyd's capital and there is not expected to be any Central Fund exposure from these events, either individually or collectively." The market's capital reserves would remain largely unaffected alongside their £2.4 billion ($US 3.9 billion) emergency fund kept for bailouts, either individually or collectively. Overall, Lloyd's believes that the insurance market's total exposure has remained well within the bounds of their plans for worst case scenarios.
Richard Ward, Lloyd's of London Chief Executive, confirmed that although the loss estimates are significant, the market remained in a sound position. "The beginning of 2011 has seen a series of tragic events that have had a major impact on communities in Australia, New Zealand and Japan. As ever, our priority remains to assess and settle valid claims as swiftly as we can to help these communities get back on their feet," he said, further remarking that, "The Lloyd's market is as well capitalized as it has ever been and, while claims from all three events could still evolve over time, the market's total exposure is well within the worst-case scenarios we model and prepare for."
Dr. Ward added that the first quarter catastrophes, as well as the recent tornadoes and flooding that have hit the southern US states, should lead to a "firming of rates" as insurance companies seek to recoup their losses.
Insurance market analysts claim that, in fact, a preponderance of sizeable natural disasters can be an earnings event rather than a capital event for insurers. A surge in claims triggers a rise in insurance rates to offset losses, forcing more exposed players to economize and enabling those still in the market to charge more for coverage.
The increased prevalence of global natural disasters since the start of 2010 have increased the cost of catastrophe insurance and reinsurance
but prices have yet to adjust, remaining artificially low due to intense competition amongst insurers for customers. Analysts now claim the market will begin to amend itself, with the cost of catastrophe insurance and reinsurance expected to soon go up 10 percent. Prices in the broader insurance market are unlikely to be immediately effected, however much depends on the second half of the year and whether the upcoming US hurricane season causes substantial insured damage and further claims.
Catlin Group Ltd., the third largest insurer operating in the Lloyd's market, said that rates for catastrophe-related insurance have already been increased and that a broad increase in coverage rates would be appropriate given the exceptional catastrophe losses already experienced this year.
Catlin Group Chief Executive, Stephen Catlin summarized the company's market outlook: "The first quarter of 2011 will be remembered for the high incidence of catastrophe losses, arising from the Japanese earthquake and tsunami, the New Zealand earthquake and the floods in Australia. Taken together, we expect these three catastrophes to be an earnings event rather than a capital event. Rates for certain classes of business are already starting to rise."
Insurance Companies Mentioned
Catlin Group Limited
Catlin is an international specialist property and casualty insurer and reinsurer, operating worldwide through four divisions: Catlin Syndicate, which operates at Lloyd's of London; Catlin Bermuda; Catlin UK and Catlin US. Catlin operates through six underwriting hubs in London, Bermuda, United States, Asia-Pacific, Europe and Canada. Catlin writes a range of product groups, including property, casualty, energy, marine, catastrophe and motor reinsurance business.
Lloyd's of London
Lloyd's is the world's leading specialist insurance market and occupies fifth place in terms of global reinsurance premium income, and is the second largest surplus lines insurer in the US. In 2009, 74 syndicates are underwriting insurance at Lloyd's, covering all classes of business from more than 200 countries and territories worldwide. Lloyd's is regulated by the Financial Service Authority.