Natural disasters and re-insurance
The combined ratios of the large re-insurers are penalised by natural disasters and by the oil catastrophe in the Gulf of Mexico.
Weather events and exceptional natural disasters, such as the earthquakes in Chile and in Haiti, floods in France and elsewhere in Europe, and human-induced events like the Deepwater incident in the Gulf of Mexico in the first six months of this year represent an amount estimated at about 70 billion US dollars (73.8 billion Swiss francs).
According to estimates made by the world’s number one re-insurer, Munich Re, about 22 billion US dollars (23.2 billion Swiss francs) will have to be absorbed by the companies, which is a level of damages more than twice that of the average noted since 2000 – and that, too, just for the first half of 2010 (L’Agefi – L’Agence Économique et Financière – The Economic and Financial Agency, France).
Swiss Re, the world’s second-largest re-insurer, will take on its share of liability, which stands at over one billion US dollars (1.05 billion Swiss francs).
These disasters weigh heavily on the accounts of the leading re-insurers.
Their combined ratio, which is an index of profitability in the sector, is represented by the ratio between the cost of claims and the premiums. A ratio higher than 100% shows that a loss is being made (Le Temps, Swiss Re).
Munich Re’s ratio, which stood at 97.9%, rose to 106.4% for the first half of 2010 (Munich Re), whereas for Swiss Re, where the ratio was 88.3% in 2009, it rose to 102% for the same period.
On the other hand, the return on investments is showing solid profits, allowing capital bases to be increased, which is a cause for optimism among management teams.
In addition, a policy of prudence when subscribing and renewing, adjustments to the risk portfolio, a conservative attitude tending to attribute greater weight to margins than to growth, and the maintenance of profitability all tend to show that “everything is under control”.
However, the second half of the year opened with significant disasters: fires in Russia and floods in Pakistan. The cost of each of these events is already put at 15 billion US dollars (15.5 billion Swiss francs) (TdG: La Tribune de Genève). It should also be noted that the hurricane season will worsen over the Atlantic in the coming weeks.
Those facts do not rule out other imponderables that are linked to economic growth and the financial markets, making perspectives all the more uncertain.
Another, parallel, market is that of “cat. bonds” (catastrophe bonds), which are subscribed by private, institutional, or state investors. In the first half of 2010, catastrophe bonds were issued by insurance and/or re-insurance companies, and subscribed to an amount of 2.35 billion US dollars (2.48 billion Swiss francs) (Advisen).
Catastrophe bonds allow investors to diversify, and issuers to reduce part of their exposure via a transfer solution.
Sources:
· L’Agefi, “Six mois lourds en catastrophes – Six months weighed down with disasters”, 04.08.2010.
· Le Temps, “SwissRe se redresse mais dépeint un environnement difficile - Swiss Re is back on track, but paints a gloomy picture”, Emmanuel Garessus, 06.08.2010.
· Swiss RE, Media information
· Munich Re, Press release, 1st half, financial year, 04.08.2010
· Advisen/Business Wire, Catastrophe Bond Issuance Surges, Guy Carpenter, 09.09.2010
· Tribune de Genève, “Les réassureurs misent sur les catastrophes naturelles – Re-insurers gamble on natural disasters”, Frédéric Vormus, 19.08.2010
· Reuters/Insurance Journal, “European Insurer Groups Weather Storm “, 05.08.2010