Willis Re: Japan Quake Not Enough to Turn Soft Market

March 31, 2011

A report from Willis Re, the reinsurance brokerage arm of Willis Group Holdings, notes that “relatively orderly price movements at the April 1 Japanese reinsurance renewals reveal that the Tohoku Earthquake is not the catalyst that will bring about a hard market.”

However, the report also indicated that the “total tally of first quarter devastation including the Japan, Chile and New Zealand earthquakes and the Australian floods, have significantly accelerated the likelihood of a market-wide turn should reinsurers be tested again this year.”

The Report, provocatively entitled “Shaken and Stirring,” found that “while there have been rate increases on Natural Catastrophe Excess of Loss of between 5 and 50 percent, the Tohoku and Christchurch earthquakes are not by themselves sufficient to drive up market-wide pricing.”

Willis Re said that in order to “trigger a hard market there needs to be an additional accelerant, which could be another major natural catastrophe loss, inflation, the reversal of back-year reserve releases or wider financial issues impacting investment income and balance sheet strength.”

The report also points out that the “total 2010 catastrophe losses – approximately $60 billion of insured losses to the global insurance industry in a 13 month period to March 2011 – it is currently estimated that between $35 to $42 billion has been passed from primary insurers to reinsurers.”

However, so far the reinsurers “have been able to absorb these large losses due to their robust capital position – a product of excellent underwriting results in 2009 and strong investment performances for both 2009 and 2010. But Willis Re warned that, while reinsurers’ financial strength may be largely unimpaired, their financial flexibility could be impacted resulting in less M&A and reduced share buy backs and other excess capital management techniques.”

The report indicates that the most immediate challenges for many reinsurers are the losses suffered to date, which have “largely exhausted their annual catastrophe loss budgets. In response, reinsurers are trying to proactively manage their underwriting results for the remainder of 2011 by applying rate increases in areas of natural catastrophe loss activity and tightly controlling their capacity deployment.”

Willis Re Chairman Peter Hearn commented: “While the financial strength of the reinsurance industry remains remarkably intact in the wake of Tohoku, it can only withstand so many blows. The reinsurance industry is on the cusp of change and a hard market may be only one more major event away. It could be something as dramatic as a catastrophic hurricane during the upcoming North Atlantic and European winter windstorm seasons or something more systemic like creeping inflation, but whatever the cause, reinsurers have proven their resilience and are gearing up for a bumpy ride over the remaining months of 2011.”

Source: Willis Re

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