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Insurers Must Prepare for Asian "Supercats", Warns Aon Benfield

Posted on 13 Oct 2010

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Aon Benfield, a premier reinsurance intermediary and capital advisor, is warning insurers in Asia to prepare for future “Supercat” events like those experienced in the USA. A Supercat event is defined as generating an insured market loss of at least USD10 billion and in Asia is most likely to occur in Japan, China and South Korea. 

By comparison, the USA will almost certainly continue to rank Number One in terms of Supercat losses for the foreseeable future due to the frequency of major hurricanes alone – such as hurricanes Katrina, Rita, Wilma in 2005 - without even considering earthquake and terrorism-related losses.
Aon Benfield research also revealed the following Supercat loss scenarios:
- Japanese typhoon is a major Supercat peril due to its severity and frequency. Repeats of typhoons Mireille (1991), Vera (1959) and Nancy (1961) could all produce Supercat insured losses, as could a direct hit of a strong (Saffir-Simpson Category 3) typhoon on Tokyo.
- Continued strong economic growth, coupled with increasing insurance penetration, could result Supercat losses in mainland China in the next decade. A repeat of the 1976 Tangshan magnitude 7.6 earthquake could today cause insured losses ranging up to about USD3 billion. However with 10% growth in both underlying values and insurance penetration per annum this figure could reach USD10 billion if such an event occurred from 2016 onwards. Similar losses could result from a repeat of the 1679 Sanhe-Pinggu magnitude 8 event near Beijing or the 1668 magnitude 8.5 Tancheng event in Shandong.
- Seoul in South Korea experienced damaging earthquakes in AD 89, 1385 and 1518 with magnitudes apparently ranging from 6.5 to 7.5 (Chiu & Kim, 2004). Any major earthquake around magnitude 7 affecting Seoul today would cause a major, perhaps Supercat-sized, insured loss.
Dr. Will Gardner, head of Aon Benfield Analytics Asia Pacific, said: “The first step is for insurers and regulators, particularly in China and South Korea, to recognise the possibility of Supercat-sized earthquake losses and take action to ensure adequate catastrophe reinsurance protection.”
Dr. Nigel Winspear, senior director at Aon Benfield Analytics, added: “Natural perils in Asia do not appear to be increasing in frequency or severity, however market conditions are changing with increasing insurance penetration and higher property values reflecting ongoing economic growth. Property insurance penetration in Asia is generally low and weakest in residential lines but often high in commercial and industrial lines. Some insurers opt to purchase as little catastrophe reinsurance protection as possible to maximise their retained premium.”