So far several major catastrophes have not had a big impact on commercial property insurance prices. But how long will this situation last, asks James Bray
Even despite the recent spate of large natural catastrophes, prices for commercial property and business interruption cover remain at historic lows. In contrast, the reinsurance industry is reeling from huge rate increases, particularly since the earthquake, tsunami and nuclear disaster that struck Japan in March this year.
Paul Hopkin, Technical Director at Airmic is not surprised that the commercial insruance market remains stable in the face of huge catastrophes: “That’s what the insurance world does, it pays out big losses. We’re not surprised that despite big losses the market remains fairly benign.”
He said there are a number of reasons why this is the case: “We still see stability in the market because it’s profitable, because of well managed risks and because of capacity.”
In addition, some of the losses incurred in Japan and in the floods in Australia bypassed the insurance market, explained Hopkin: “There has been a significant amount of self-insurance by way of captives or other mechanisms, or some of these risk exposures were uninsured. Also a lot of these losses have been in the domestic market and of course we operate in the commercial market where perhaps the losses have not been as great.”
A catastrophic hurricane season in the US, however, could have a much more dramatic effect on the (re)insurance market. The catastrophe modeller RMS has already projected higher losses for this years hurricane season.
In fact, Martyn Street, a director at rating agency Fitch, said losses incurred by insurers in the first quarter of this year are already putting pressure on the direct insurance market. “We’ve seen April renewals in the Japanese markets delayed for up to 90 days and also significant rate increase on affected lines.”
“The three sources of insurers earnings are under pressure," said Street. "The main source of income for insurers is investment income and at the moment we’re in a period of low-yield investment." There is also a general trend for softer pricing as well as less potential for reserve releases, he added, both of which are putting pressure on insurers income.
These pressures suggest that at some point a change within the market has to come. “Insurers have seen their return on capital fall…the expectation is that at some point we will see a hardening of the market as insurers address this fall on return,” said Street.
George Davies, head of UK risk management at Marsh, agreed that events in Japan had a big impact on the insurance industry but he does not believe that it will be the catalyst for a major change within the market. “In terms of a night and day moment regarding of pricing, certainly not.”
However, Davies added that preparing for a harder market is a prudent thing: “The risk manager is the decision maker around insurance. He or she is preparing themselves for a hardening in the market and looking therefore at retention and whether the key insurance lines are presenting value for money."
With any luck changes in the insurance market will not happen over night. Hopefully that will give risk managers enough time to assess their insurance options and prepare for future uncertainties.
