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Reinsurers Could Bear Three-Quarters of Chilean Quake Losses

Source: Dow Jones

Posted on 04 Mar 2010

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Reinsurers, particularly some located in Europe, could bear upwards of three-quarters of insured losses from the Chilean earthquake, which is shaping up as one of the costliest quakes in history.

"It's certainly going to be in the top five, though it won't be number one," Insurance Information Institute President Robert P. Hartwig said.

Early estimates by catastrophe-risk analysts put insured losses for Chile in the range of $2 billion to $8 billion. The numbers are well within what the insurance industry expects for a few major disasters every year and the global reinsurance business is designed for just these types of catastrophes. But viewed in the context of previous earthquakes the figures are quite large.

A quake that rattles buildings and infrastructure widely but leaves little damage often won't tap into the global reinsurance pool, which kicks in as a kind of reserve. This wasn't the case in Chile, where the quake struck hard and lasted about 90 seconds with multiple aftershocks. "This probably will break through into reinsurance," Hartwig said.

If losses tend to the range's high end, they could top the $7.4 billion the Insurance Information Institute estimates the 1923 earthquake that struck Tokyo and Yokohama cost, measured in 2009 dollars. That quake was second only to 1994's Northridge, Calif. quake, which cost insurers $22.2 billion in 2009 dollars.

In Chile, ceding earthquake insurance to the companies that dominate reinsurance is a common way to hedge risk, as it is elsewhere, and most reinsurers in Chile are foreign. The practice has until now been a lucrative one for the reinsurers. The loss ratio on earthquake reinsurance was less than 1% in 2007, the latest figures available, well under the 50% or so seen in Chilean fire, marine and other types of reinsurance, according to U.K.-based AXCO Insurance Information Services Ltd.

Reinsurers assumed 74.6% of earthquake coverage in Chile as of 2007, according to the AXCO estimate.

It's still not clear which companies would be most affected, as few have given estimates. But among the country's biggest reinsurers, counting intragroup reinsurance, are Switzerland's Zurich Financial Services AG), Mapfre Re, a unit of Spain's Mapfre S.A., and Royal & SunAlliance Seguros Chile S.A., a wholly owned subsidiary of U.K.-based RSA Insurance Group PLC. AXCO considers the three companies the most significant reinsurers in Chile.

A spokesman said Zurich reinsures only its own businesses and does not reinsure the risk of other companies. Zurich has about 7% of Chile's market for life, general and property & casualty insurance, the spokesman added.

The company said it is still too early for an estimate. "In case the losses should turn out to be material, we will inform the market accordingly," spokesman Sean Kevelighan told Dow Jones Newswires by email.

RSA is the only company of the three to issue a loss estimate. It said Tuesday the likely impact would be GBP30 million, but that figure is net of reinsurance. Wednesday, an RSA spokesman declined to reveal reinsurance figures and also declined to say which companies reinsure it. The company said Tuesday it does not expect the earthquake to affect its operating ratio for the year.

Mapfre officials did not immediately respond.

Although most industry figures remained tight-lipped, the challenges were viewed as manageable.

"There are a number of reinsurers that are involved, including some of the largest in the world, and these losses will be spread around the world," the Insurance Information Institute's Robert Hartwig said.

"Two to eight billion is well, well, well within the capacity of the global reinsurance community," he added. "It's something they expect to happen."