Reinsurers’ Rendezvous Reveals Reflection; Sea Level Rise Imperil Coasts; Pirates Ahoy!

The world’s reinsurers gathered in Monte Carlo over the first weekend in September for their annual conclave. This year’s meetings were calm by comparison with prior years — no hurricanes ravaging Florida, and a financial crisis that’s eased, leaving the reinsurance industry relatively unscathed.

True, many reinsurers took some extensive write downs on their investment portfolios last year, but, unlike the banks, they were far less affected by the crisis, as they participated in relatively few complex financial instruments.

So far 2009 has been a relatively benign year in terms of natural catastrophes, and premium rates seem to be holding relatively firm in most lines. Earnings have been solid, and the “capital crisis,” which some industry execs were predicting at the beginning of the year seems to be less of a threat.

However, the good news has also meant that it will be far more difficult to impose higher reinsurance premiums in most lines. Monte Carlo, followed by another meeting in Baden-Baden in October, are mainly focused on determining what rates are charged for the upcoming 2010 renewal season that begins in January. However, Reuters reported that the global reinsurers have acknowledged that the big price increases they predicted for 2009 did not materialize.

They failed to do so mainly because the rest of the world’s economies, notably the U.S. and Europe, are still suffering from a serious recession, which has led to the closure of a number of businesses, a collapse in construction, increased unemployment and a significant reduction in new investment. This affects the primary market, as there’s less demand for insurance coverage, which in turn reduces the demand for reinsurance.

As a result, “this renewal season is likely to highlight the lack of leverage the reinsurance industry has over its clients,” stated Collins Steward analyst Ben Cohen. “Absent a very large catastrophe by the end of the year, we think property reinsurance pricing will stay flat at best in 2010.”

PartnerRe’s President and CEO Patrick Thiele described the current situation as “profitable stagnation,” where reinsurers see limited premium growth but remain in the black.

However, when premiums are stagnant, reinsurers have historically tended to try and maintain their market share, mainly by reducing rates, thus maintaining the seemingly inescapable “hard/soft market cycle.” Time will tell if that’s going to be the case this time around.

The peril of rising sea levels is becoming an increasing concern, as predictions of how high the oceans will rise seem to come up with larger estimates every week.

A recent article from Reuters by Michael Perry points out that around the world, owners of prized seaside properties face the prospect of not just losing their homes but receiving no compensation, as insurance policies may not cover climate change losses in the future.

Sea levels are widely expected to rise about one meter (3.3 feet) this century due to climate change. That’s a lot more than the 18-59 cms (7-23 inches) forecast by the United Nations Intergovernmental Panel on Climate Change (IPCC – www.ipcc.ch) in its 2007 report. Coastal communities around the world are already feeling the destructive effects of more frequent and violent ocean storms — a portent of rising seas.

In Australia alone there are an estimated 711,000 homes and billions of dollars worth of assets and infrastructure at risk from rising sea levels and storm surges, according to the country’s climate change office. Coastal flooding and erosion already costs Australia’s most populous state New South Wales A$200 million [US$168 million] a year.

The prospect of an imminent rise in sea levels directly concerns the insurance industry. The Florida Keys, Miami Beach, Sanibel and Captiva, and Palm Beach, the exclusive east coast hideaway of the super-wealthy, are all built on barrier islands and some experts believe these sand islands would be swamped by rising seas.

But it’s not just high priced beach houses that are at risk from storm surges and rising seas. Parts of Cape Canaveral, home of the Kennedy Space Center and the space shuttle launch pads, and Tampa Bay are also considered vulnerable.

In New York City, with more than 8 million people, a sea level rise of 1.5 feet [45 cms] by 2050 and a category 3 hurricane could wash away seaside restaurants and centuries-old homes perched along Rockaway Beach and near the famed Coney Island boardwalk. Southern Brooklyn and Queens, Wall Street in lower Manhattan, and eastern Staten Island could also end up underwater.

In California, nearly $100 billion worth of coastal property and infrastructure are at risk of severe flooding from rising sea levels, warns the Pacific Institute, an environmental think-tank.

The insurance industry seems to be increasingly convinced that rising seas are inevitable, and will cause huge losses. Covering them, in addition to the weather related losses the industry already covers, is becoming an unlikely proposition.

In Australia you cannot be insured for rising sea levels and the Insurance Council of Australia does not see that policy changing, despite identifying 896,000 residential properties it says have “significant exposure”.

Piracy in and around the Gulf of Aden looks set to increase, as the summer’s monsoons subside. Warnings from the U.S. Maritime Administration, Aon’s London office and others all point out that the decrease in attacks recently has been mainly attributable to the bad weather.

Aon urged ship owners looking for kidnap and ransom coverage to “seek quotes now before an improvement in weather lures Somalian pirates back into the waters.” The broker expects premiums for the coverage, which have fallen by around 30 percent recently, to start upwards again soon.

Acting Maritime Administrator David Matsuda urged mariners “to take defensive measures and not surrender at the first sign of a threat.” The agency also warned vessels to avoid routes where attacks have taken place, and recommended that mariners “demonstrate a willingness to defend yourself,” and to “travel at “maximum sustainable speed” through “high threat areas,” along with maintaining regular risk assessments during their voyage.

If a vessel can’t outrun the pirates, and the crew doesn’t feel like trying to outgun them, K&R protection should be in place as a fall back. Ransoming ships and crews is very expensive.

Topics USA Reinsurance Climate Change Market Australia