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November 01, 2011 at 08:00 PM
Advisors already know that 2011 has been a tough year for insurers. Losses from catastrophic storms, earthquakes and the nuclear disaster at Fukushima have resulted in the first half of the year being the most costly six months in the history of the insurance industry—some 323 years. And that’s before losses from Hurricanes Irene and Lee, which wreaked billions of dollars in damage from flooding, rain and wind across the Eastern seaboard.
Reinsurers are going to be raising rates, thanks to a combination of expensive disasters and low interest rates, and property/casualty insurers won’t be far behind.
Reinsurers’ rates have fallen worldwide in four of the past five years, according to the Guy Carpenter World Property Catastrophe Rate On Line Index, thanks to, among other things, moderate loss activity and substantial industry surplus. But by July 2011 that was changing, as numerous expensive catastrophes and a poor economic climate eroded reinsurance-dedicated capital. A changing catastrophe model added a further variable into the mix and has already affected how catastrophe bonds are written, according to A.M. Best.
The size and expense of insurable events in 2011 had already led reinsurers to say in an early September Bloomberg report that they would be raising rates, despite the poor economic situation globally. They are also taking steps to mitigate other risks, such as moving investments to higher ground, as Lloyd’s of London did when it moved funds out of eurozone banks with exposure to Greek debt lest those banks fail.
It’s not just expensive natural disasters that necessitate a move to higher premiums. Low interest rates are another major factor and have kept reinsurers and insurers alike from keeping comfortable margins through investments. The financial crisis hurt insurers as well as investors, and the absence of major disasters for a brief time kept premiums from escalating. Now, however, Brian Gray, the chief underwriting officer at Swiss Re, said in the Bloomberg report that “[t]he fat is gone” and underwriting must tighten to make up for it. Meetings in September and October were expected to see negotiations on rates between reinsurers and insurance companies.
