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Panel Examines What Heightened Catastrophe Activity Means to the Industry

Source: A.M. Best

Posted on 18 Jul 2011

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Earthquakes this year in New Zealand and Japan, floods in Australia and tornadoes in the United States have affected property insurance markets in major ways, according to a panel of insurance and catastrophe experts in an A.M. Best Co. webinar presented by Lexington Insurance Co. The webinar, "What the New Normal in Catastrophe Activity Means to Risk Managers, Brokers and Insureds," was held on July 14.

For the first time in a long time, reinsurers have taken significant losses, often multiples of what they have put aside, said Sanjay Godhwani, executive vice president and executive of the property division at Lexington. The result of these cumulative losses are likely to be higher premiums, at least regionally, he said.

Laurie Johnson, senior science adviser at Lexington, back from a tour of devastated areas of Japan with government officials, said the losses were "striking" even three months after the disaster. An important issue is the underestimation of maximum risk, even in a country with a long history of preparedness and a strong record in science and engineering. "The sirens, earthquake plans and tsunami defenses were all overwhelmed," she said.

The run-up height of the tsunami was as much as 38 meters, far higher than the 12 to 15-meter barriers built to contain the sea surges, Johnson said.

The earthquake in Christchurch, N.Z., occurred along an unmapped, unknown fault, she said. "What we have is a confusing picture. On the one hand, we understand so much more, but we also see there are a lot of uncertainties."

Like other parts of the Pacific Rim, the Northwestern United States is susceptible to earthquake activity. Johnson said in 1700, an earthquake struck in the Pacific Northwest that was about the same magnitude as the one that hit Japan this year, and it generated a similar-size tsunami.

The insurance industry faces issues that lead to a potential underestimation of risk, said Godhwani. One issue is the tendency to model for risks over a three- to five-year period. Another is to account for pockets of the world where there is a concentration of industry, such as in Japan, where two or three suppliers of similar goods may be based in the same area.

This year's tornadoes killed at least 580 people in the United States, the first time since 1974 that storms killed more than 100 people in a single year, said Roger Pielke Jr., professor of environmental studies in the Center for Science and Technology Policy Research at the University of Colorado. He said the tornadoes generated some $15 billion in insured losses and $23 billion in all, the third-worst year since 1950 in the broader context of damage versus gross domestic product. Pielke said it would be an error to conclude there's an upward trend in tornado damage based on what happened this year, however.

On the flip side, no Category 3 hurricane has made landfall in the United States in more than 1000 days. Godhwani said that can breed complacency, but hurricane predictions can keep public awareness high.

In the realm of man-made catastrophes, Brian Finlay said while there are positive implications from the killing of Osama bin Laden, we do not know whether his death will lead to fewer attacks or to the demise of Al Qaida itself. Evidence seized during the raid of bin Laden's compound implied he had a large role in operational planning, contrary to prevailing opinion before then that his role had become marginal, said Finlay, senior associate director of the Henry L. Stimson Center, a Washington, D.C. think tank. Finlay said there are other organizations out to kill Americans, and they may target softer targets such as railways, shipping, the financial sector, energy businesses, symbolic properties and entertainment industries.

Capacity for terrorism insurance is much greater in the United States than in other parts of the world, said Godhwani. However, buyers tend to be in the large cities with not nearly as much interest elsewhere, he said.