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Catastrophe Reinsurance Rates May Rise on Quake, Allianz Says

Source: Business Week

Posted on 26 Mar 2010

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The earthquake that struck Chile last month may help boost rates for catastrophe reinsurance this year, the head of Allianz SE's reinsurance unit said.

"I would be surprised if the earthquake in Chile didn’t lead to a discussion about rates this year," Clemens von Weichs, head of Allianz Re, said in an interview. "We still need another six to 12 months until we get clarity on the insured losses."

The 8.8-magnitude earthquake, the world’s fifth strongest in a century, leveled buildings, knocked out power lines and damaged 1.5 million homes. Insurers may face $4 billion to $7 billion of claims from the temblor, according to estimates by Munich Re, the world’s biggest reinsurer, making it the second- costliest for the industry in the last 30 years.

Prices for catastrophe reinsurance fell for the third time in four years in the annual contract renewals on Jan. 1, according to Guy Carpenter & Co., a unit of brokerage Marsh & McLennan Cos. The next major renewals dates will be April 1, when most reinsurers renew contracts with customers in Japan and Korea, and July 1, when parts of the U.S. market, Australia and Latin America are up for renewal.

Reinsurers are expected to shoulder a “significant portion” of costs related to the Chile quake and winter storm Xynthia, which struck western Europe on Feb. 27, Moody's Investors Service said on March 19.

Chile Claims

“Reinsurers won’t be able to cover claims from the Chile quake with just the premiums collected in Chile,” von Weichs said. “The costs have to be born partially by international cat premiums too. That could have an impact on prices for the reinsurance of other cat events.”

Allianz Re, which assumes about 27 percent of Munich-based Allianz’s reinsurance coverage including a share of natural- catastrophe related risk and places the rest with other reinsurers such as Munich Re or Swiss Reinsurance Co., had gross premium income of 4.1 billion euros ($5.5 billion) last year, a rise of 8 percent from 2008.

“I generally expect stable premium income at Allianz Re this year, even as the economic downturn weighs partially on primary insurers’ premium income,” von Weichs said.

The European Commission’s Solvency II directive, due to take effect toward the end of 2012, “is currently a key topic for the insurance industry,” von Weichs said. The new regulatory framework for insurers in Europe, which is designed to align capital requirements with risk, offers new business opportunities for reinsurers as the new rules “will recognize reinsurance to some extent as capital relief,” he said.

Catastrophe Bonds

Insurers’ capital needs “will certainly rise” during the next decade as insured values are increasing. Additional capacity is needed and capital-market offerings like catastrophe bonds will become more interesting for insurers.

The cat bond market “will continue to offer opportunities for reinsurers and insurers,” von Weichs said. “Administrative costs and transaction charges in the market generally need to come down,” he said.

Allianz sold its most recent cat bond, $180 million of coverage against U.S. hurricanes and earthquakes, in April 2009.

“For Allianz the timing of the next cat bond hasn’t been determined, but you can expect Allianz to remain visible in this market in the future,” von Weichs said.