CAT – Insured Loss = Big Difference!

If one had to be a fly on the wall in networking venues during the Montecarlo Rendezvous or Baden Baden Convention he or she would have quickly realised that discussions would have been dominated by the primary markets’ need to harden because of the escalation in number and value of catastrophes around the globe.

One of the most significant news in this respect during the last quarter of this year is that Munich Re, Swiss Re and SCOR, for example, issued US$ 6 billion in bonds for European and USA windstorms.

2011 had its fair share of disasters and by the end of the 3rd quarter Lloyds of London had already reported losses close to £ 700 million British Pounds primarily due to losses emanating from Japan, Australia, New Zealand and Thailand in almost all 4 quarters of 2011. However, by mid-2012 Lloyds had already posted a profit of  £ 1.53 Billion British Pounds. Given the leap, one would necessarily question whether this is due to excellence in operating performance from the end of 2011 to mid-2012 or whether it largely represents a positive run-off on claims reserving from the previous year’ losses. Probably the truth lies somewhere in between.

2012 also didn’t lack natural calamities, not least Hurricane Sandy that wreaked havoc particularly in New Jersey, Pennsylvania and New York. Whilst the catastrophe risk consulting firm Eqecat estimated the total cost of damage in the region of US$ 50 billion, consisting mainly of property damage, increased cost of working and consequential losses, the cost to the insurance industry is likely to be less than 40% of this notwithstanding that Hurricane Sandy already has a higher price tag than Hurricane Ike (2008) and Hurricane Ivan (2004). One would also have thought that the power of hindsight would have made insurance purchasers wiser. However, it appears that it is the insurers (and not their consumers) that became wiser since certain catastrophe perils (post, say, Ivan) became ‘buy-backs’ at an additional premium … and it seems that several consumers, particularly private policy holders, opted not to spend the extra amount on the buy-backs. Of course, the bigger picture in the form of indirect losses (due to sub-way outages and protracted recovery periods would, though substantial in value particularly to small and medium sized businesses, mainly do not feature as insurable losses.

For practitioners active in the GCC market, the above scenarios conjure back images of Hurricane Gonu in Oman. Whilst the hurricane in 2007 was substantially devastating for both private individuals as well as business and commerce, the insurable loss was negligible when compared to total losses. This was mainly attributable to two factors, i.e. a relatively low culture of insurance at the time in Oman as well as, under motor policies (where insurance is compulsory) a standard exclusion on such natural catastrophes as flood. It appears that Hurricane Phet in 2010, although having a much smaller impact on Oman (whilst Gonu estimates are in the region of US$ 5 billion, Phet’s are more in the region of US$ 300 million), proportionately more of Phet’s losses were insured. An increase in market pricing (particularly in Motor insurance) as well as an adjustments in limits and priced buybacks under say construction project insurance reflected more the market realities that have to reserve for such contingencies.

Similarly in the UAE (even as recent as early 2012) various consumers cried ‘foul’ when insurance companies did not compensate them for flood damage to their cars, blaming it on the Insurance Authority approved wording for Motor Insurance in the UAE. The truth of the matter is that this wording is only an absolute in that it is the ‘minimum acceptable’ level of cover for the market and consumers can demand more  cover (needless to say, at a premium) in the form of buy-backs of certain fundamental peril exclusions such as flood. Not every spade is a spade and the fact that ‘comprehensive’ policies are priced differently should be an indication that the level of cover under the respective ‘comprehensive’ policies is also different.

Back from the mundane world of motor insurance to the world stage of natural catastrophes, Munich Re conducted an interesting study in 2011 on the 10 deadliest hurricanes and tsunamis across the globe between 1985 and 2010. The total value of recorded losses is in the region of US$ 800 million. However, only around 10% of this was actually recouped from insurance.

Why the disparity? The reasons are various, ranging from geographical / region, economic, cultural amongst others. The following table provides some insight as to what extent these catastrophes were insured:

Industrialised Countries (US$ millions): Developing Countries:
  Damage Insured Percentage   Damage Insured Percentage
USA

54

16.06

30%

Chile

30

8

27%

Australia

1.2

0.67

56%

S.E. Asia

10

1

10%

New Zealand

26.5

15

57%

Mexico

4

0.275

7%

Japan

140.5

4.095

3%

Taiwan

14

0.75

5%

Turkey

12

0.6

5%

Source: Analysis by J. Portelli of Geo Risks   Research (Munich Re) March 2010. 36% of estimated tsunami and earthquake   losses in the industrialised countries were insured compared to less than 1%   elsewhere. Armenia

14

negl.

negl.

Haiti

8

0.2

3%

Iran

7.6

0.119

2%

India

4.5

0.1

2%

China

85

0.3

negl.

 

Prima facie, the only ‘surprises’ in the above tables are Japan (Kobe) and Chile. The possible explanation to these is that whereas the Kobe (1995) earthquake occurred over 15 years ago and did not significantly affect urban areas (in comparison to others), the Chile disaster occurred mostly in an inhabited area. Also, though classified as ‘developing economies’ insurance density in some of the urban and/or industrial Latin American markets is proportionately higher than other developing economies. These factors may explain the two blimps.

The US$ 6 billion bonds raised by Munich Re, Swiss Re and SCOR also perhaps signals that this is a precursor of market hardening for catastrophe losses in the same way that the Marsh and McLennan and the Guy Carpenter (then separate entities) cat bonds in the USA in the 1980s preceded a period of market hardening. Maybe the link is not so strong because other factors contributed to escalating losses then (such as Piper Alpha or occurrence wordings faced with asbestosis claims among others). Nevertheless, the period did have its natural catastrophes as well; such as the Great Storm (UK) in 1987 and Hurricane Hugo in 1989.

There is a domino effect to reinsurers raising capital to finance catastrophic losses is insurers (or cedants) either charging extra or excluding such perils from the primary market. The knock-on effect on the consumer is that, theoretically, they either cough up at the time of purchasing insurance and, if not, to do so at the time of a claim.

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About insuranceguild

Sharing Knowledge for the Common Good: Many associate guilds with British pre-industrial era. However, predecessors of guilds are found as far back as the 3rd century BC in the Roman Empire. They were also present in various civilizations including Ptolemaic Egypt, India, Iran, China, African dynasties as well as various European countries such as medieval Germany and Italy. A guild is typically an association of practitioners from the same trade. In addition to protecting and developing crafts, trades and business, guilds also helped foster a learning environment among members. Through this platform I wish to share articles of an insurance / risk management nature and hopefully generate comments from readers that would help to enrich my knowledge as well as the knowledge of other insurance and/or risk management practitioners. About the Author: A Chartered Insurance Practitioner by profession, James Portelli is also a Fellow of the UK Chartered Insurance Institute and of the UK Institute of Risk Management and holds an MSc in Risk Management from Glasgow Caledonian University, U.K. James has been active in insurance and risk management since 1990 and in training since 1987. He started his insurance career in general insurance underwriting and agency/broker management with Middlesea Insurance plc (also forming part of the company's Risk Management Implementation Committee and assisting in captive insurance development). He first moved to the Middle East in 1998 occupying senior training, technical, consulting, business development, risk management and strategic development roles. James is also a 2008 CII (UK) Morgan Owen Prize Winner and the 2011 IRM (UK) Steve Butterworth Award Holder.
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