Posted on May 27, 2011 by Sergio Ulloa
The devastating natural catastrophes, including tornadoes, floods and global earthquakes that have already hit in 2011 have US insurance companies bracing for heavy losses. These insurers are now eyeing rate increases to restore their reserves as the busy Atlantic hurricane season approaches.
The US Hurricane season lasts from June 1st to November 30th, when violent storms usually can gather off the southeast US coastline and batter populous and heavily insured properties in the region. This year's hurricane activity could prove a tipping point for the property and casualty insurance industry, which has been forced by heavy competition and excess capacity to cut or hold cover prices since 2008.
International insurance and reinsurance companies have already absorbed an unprecedented US$55 billion in catastrophe claims from the first quarter of 2011, more than they paid out in all of 2010.
The exceptional frequency of natural disasters, foremost of which is the March 11 Japanese earthquake and tsunami,
has been the predominant news item for insurers this year. Global catastrophe costs are trending upwards.
The insurance industry has taken a further multi billion dollar hit from the recent US tornadoes in April and May. Market analysts estimate that additional sizeable hurricane losses could be the final straw that would force insurers to hike prices in an attempt to preserve capital and rebuild their balance sheet. This could ultimately result in a 'hard' reinsurance market, whereby reinsurers are able to charge more for the risk cover they provide to their insurance company clients.
In an interview, Amit Kumar, analyst at Macquarie in New York, agreed that another substantial loss in America could turn the market: "It's only a large U.S. event that can turn things around. The U.S. is the biggest insurance market with the biggest exposures," he said
As a result of the Japanese quake and other international natural disasters, the directly-affected markets, such as catastrophe reinsurance, have already responded and the average cost of cover for such events has risen by between 10 and 15 percent.
Now, given the industry's weakened financials,
analysts predict any substantial hurricane loss this summer could move the market and trigger a broader rise in cover prices, across multiple insurance sectors, than has been seen in previous years.
Ben Cohen, analyst at stockbroker Collins Stewart in London, suggested that the loss threshold that would necessitate a rise in prices for the upcoming hurricane season could be half the US$40 billion estimates from last year.
"Maybe as low as $20 billion would be enough. You've got fairly marginal profitability in a lot of the U.S. industry and quite a lot of reinsurers that are somewhat impaired," he told reporters.
A study from Swiss Re noted that a US$20 billion hurricane would be the third-most destructive on record.
Most established insurers and reinsurers have weathered the first quarter catastrophe losses with their earnings hurt but remain well capitalized, with the ability to raise supplemental funds if necessary. This leads other analysts to predict that a loss of US$50 billion or more would actually be required to impact the market convincingly,
Storm forecasters have been unanimously predicting a more active than usual summer hurricane season. Tropical Storm Risk announced on Tuesday that it expected at least four major hurricanes to occur this year, compared with the average of three. The forecaster gave a 59 percent chance of an above average amount of storms hitting the Southern US coast this year.
"At present, all main climate indicators point to the 2011 hurricane season being above norm but less active for basin activity than 2010, and more active for U.S. landfalling activity than 2010," said Mark Saunders, Head of Tropical Storm Risk, in a statement.
"If a major hurricane does not strike the United States in 2011, it will be the first occasion going back to at least 1900 where six consecutive years have passed without such an event," he added.
Hurricane losses over the past two years have been negligible. None of the anticipated storms that formed over the western Atlantic in 2009 or 2010 ever made landfall. According to Weather Services International, there has not been an unbroken run of three straight hurricane-free summers in the United State since the 19th century. Meteorologists are skeptical that insurers' luck will be likely to hold out for a third year.
Fervent tornado activity, the second largest source of insured losses behind hurricanes, is also predicted to continue in the short term. Already, 1,151 tornadoes have occurred this year, nearing the 1,282 reported in all of 2010, but below the all-time US high of 1,820 in 2004. A tornado watch, a federal warning that the deadly storms may develop, has been posted from Mississippi to Ohio. So far, tornadoes and thunderstorms have caused at least US$3 billion in insured losses this season.
The increase in storms has insurers preparing for the worst.
The global insurance industry has faced a tumultuous year thus far.
Many companies have had their annual claims budgets overwhelmed by the cost of a series of unprecedented natural disasters in the Asia Pacific region. One mitigating factor that should placate investors in the industry is that the current turbulent climate will enable reinsurers to exact higher rates in areas where claims will remain high