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Insurance Sector Reacts to Japan's Earthquake

Source: Financial Times

Posted on 11 Mar 2011

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In the wake of Japan's devastating earthquake, European insurance stocks slumped, igniting fears that the sector which has been already hit by a number of natural disasters in recent months now faces another round of massive claims.

The quake off Japan's northeastern coast triggered a 33-foot tsunami that swept away ships, houses and farms and put Pacific basin countries on alert.

Reinsurance companies saw their share prices dip on Friday as investors in Europe reacted nervously to the uncertainty. Swiss Re and Munich Re, two of the world’s largest reinsurers, both slipped by about 5 percent, while Scor, the French reinsurer, lost almost 7 percent. In London, Catlin and Amlin, two of the biggest companies in the Lloyd’s of London market, also lost about 5 percent, although Hiscox, another big name, moved less than one percent.

Reinsurers are still assessing their losses from the second New Zealand quake, which hit Christchurch just over a fortnight ago, but some market experts were already predicting that losses there of up to $12bn would be enough to stem the recent decline in catastrophe risk premium rates, at least outside the US.

The Japan quake will almost certainly solidify this trend and it comes at a critical time for the industry. The majority of Japanese reinsurance contracts are renewed on April 1, less than a month away.

The Lloyd’s Market Association, the representative body of underwriters at the Lloyd’s of London insurance market, said underwriters were “monitoring closely today’s tragic events”.

“This is clearly a major seismic disturbance causing significant damage, disruption and loss of life, but it is too early to give any accurate assessment of the likely impact on the Lloyd’s market. Lloyd’s underwriters participate on the reinsurances of domestic Japanese insurers and also have a limited amount of direct insurance business in the country. There remains a likelihood of tsunami and aftershocks in Japan and possibly elsewhere as well. Lloyd’s underwriters will continue to monitor developments.”

Lloyd’s itself said: “Our thoughts are with all those affected by the major earthquake and tsunami events in Japan. It is far too early for us to comment on any potential business impact but, as ever, our efforts will be focused on dealing with claims quickly and helping people and businesses recover.”

Experts at Aon Benfield, the reinsurance brokers, attempted to put the quake into some sort of context. “This surpasses the magnitude-7.9 Great Kanto earthquake from September 1, 1923 in strength. That event left more than 140,000 people dead in the greater Tokyo region. The Great Hanshin event on January 17, 1995 was a magnitude-6.8 tremor that killed 6,400 people. Economic damages were in excess of $100bn and insured losses were approximately $3bn.”

Analysts at Collins Stewart said that of the London companies, Catlin and Hardy looked to have the highest exposure at 16 per cent of net asset value. Lancashire had 15 per cent, Novae 11 per cent and Hiscox 9 per cent. “Unhelpfully, neither Amlin nor Beazley give any disclosure on Japanese earthquake exposure.”

Swiss Re’s exposure in contrast was about 7 per cent of NAV, they added.

Nikolaus von Bomhard, Munich Re chief executive, told analysts: “It is absolutely impossible to give you any clue of what that would mean to us.” A one-in-200 year Japanese earthquake would inflict a maximum loss on the company of about €2bn, he said.

Analysts at JPMorgan Cazenove meanwhile said they thought the losses were unlikely to be high. “Based on the fact that the government reinsures retail, that the commercial building losses look contained, and that the tsunami will have caused coastal damage to cars and boats, we would put a very initial estimate that the European reinsurers would share in a loss in the $1-2bn scale, no more,” they said.