Reinsurers to deal with Chile aftermath

It’s been quite a year already for catastrophes, and the hurricane season is not even fully upon us yet. The destruction caused by the Haiti earthquake in January was one challenge, and the Chilean quake in February proved to be yet another, but for different reasons. Both, however, have served to put capital pressure on the industry as a whole. Everyone took a hit, it seems, albeit a manageable one.

Combined reinsurance losses for the Chilean earthquake, in which more than 700 people died, have been estimated at up to $8 billion, one of the highest catastrophe losses ever recorded. However, unlike previous quakes, the Chilean quake is notable because of how well the country was insured; that is, there were a lower number of actual losses but significantly higher claims.

“A number of business interruption claims will make this earthquake different from others of the past decade,” said Martin Bertogg, head of the earthquake group at Swiss Re.

“The earthquake hit an area well prepared for this, with a lot of construction built according to modern construction codes. It will be noted for having hit a developed country that had good building standards and where insurance density is high. This means that claims for the reinsurance industry are likely to be sizeable.”

The quake—which measured 8.8 on the Richter scale, the seventh-largest recorded— struck in the centre of Chile and affected more than 1.5 million homes, buildings and other structures, with more than 100 aftershocks felt in the following days.

Despite the significance of the losses incurred, the industry is still unsure of what effect it will have on the current soft market.

“If 2010 continues to bring expensive catastrophe events—be they in the US or elsewhere—this will increase the pressure on earnings and ultimately increase pricing,” said Heike Trilovszky, head of corporate underwriting at Munich Re. “However, it is impossible to quantify this effect or to know for sure whether this will happen globally or locally in Latin America.”

Paul Felfle, managing director of Aon Benfield, Latin America, believes the effects will mainly be localised and not large enough to force a hard market. He said: “Even though it’s the largest catastrophe event to affect the region, we don’t think that this magnitude of loss will have an impact on global prices.

“The reinsurance market is going to be paying a majority of the claims at a time when the industry is well capitalised.”

Model behaviour

Much has been made of the use of cat models, but re/insurers seem confident that in this instance, the models accurately predicted the losses. They also argue, however, that every earthquake is an experience from which they can learn something new.

“Every significant loss event is an opportunity to learn about our modelling of natural catastrophes and to recalibrate models. As more information about claims is becoming available, we will be checking our models and integrating the findings into our global earthquake model,” said Bertogg.

“But based on the slowly unfolding quantitative insights from the evolving loss adjustment process, we don’t see any reason to revise the current loss estimates,” he adds. Swiss Re is expecting to post $500 million in losses from claims from the quake.

However, Munich Re, which estimates its losses from the quake to be around $543 million, remains cautious. Trilovszky said: “The range of loss estimates is still wide, and there is an uncertainty regarding the ultimate claims figures individual players will have to pay.”

All together now

To many, the earthquakes in Haiti and Chile came as something of a surprise, as the focus previously had for a long time been on hurricanes, which occur with higher frequency.

“In the last decade, the focus of the insurance industry has turned to hurricane losses,” said Bertogg. “This earthquake in Chile serves as a reminder that earthquakes can lead to severe insured losses.”

Despite the fact that hurricanes traditionally take twice as long as hurricanes to fully evaluate, the industry is confident that claims management will be dealt with efficiently.

“We think that the event will have a relatively short tail,” says Felfle, “especially as the Chilean insurance regulator stated that all insurers had to submit their claims by April 30.”

What the Chilean earthquake has also demonstrated was the impressive level to which Chile had insured itself against catastrophe and the involvement of nearly all the big players in the reinsurance industry. As Felfle said: “On an overall basis, it is fascinating to study because this is an example of where the system has really worked.”