"It's a combination of those factors which will probably in our view swing the market from being soft to hardening," said Barrie Cornes , an insurance industry analyst at Panmure Gordon & Co. in London.
The event will deplete the earnings of insurance and reinsurance companies, but it could be a significant capital event for the sector, said David Flandro, global head of business intelligence at reinsurance broker Guy Carpenter .
Flandro, citing earthquakes in Canterbury and Christchurch, in New Zealand, and flooding and Cyclone Yasi in Australia, said the "accumulation of all of those events means that a large proportion of catastrophe reinsurers' natural catastrophe budgets for 2011 have been exhausted."
Panmure Gordon has put the insured loss at more than $60 billion (42.9 billion euros), with an economic loss of more than $100 billion. No one yet knows the exact size of the loss, Cornes said. "But a lot of that will be kept in the local markets."
Uncertainty about the size of the loss and its effect on pricing has made Flandro reluctant to compare the disaster with previous events. Major losses cause underwriters to look at how their models worked, Flandro said. "We will do everything we can to help provide capacity for our clients when they need it," he said.
The Lloyd’s Market Association, which represents Lloyd's underwriters, said its members are continuing to monitor events in Japan. "Lloyd’s underwriters will be assessing their own amounts at risk and using computer-based catastrophe models to quantify the loss potential for their own portfolios," the LMA said in a statement. "Loss parameters are expected from the major catastrophe model providers in the near future."
Guy Carpenter will be watching the scheduled reinsurance renewals on April 1, June 1 and July 1 for their effects on the capital supply in the global reinsurance sector, Flandro said.
The disaster in Japan, Flandro said, "has the potential to impair the excess capital generation of the sector. It is no longer only about earnings. It is also about capital."
Cornes is not predicting a dramatic turnaround in rates or a sudden rush of capital into the market. Rather, he described the events in Japan as "probably the straw which will finally change the market."
If rates show sustained increases, there will be opportunities for insurers to raise capital. Before the disaster in Japan, Panmure Gordon had been expecting the commercial insurance market to harden over the next six months or so, Cornes said.
The April 1 renewals may be delayed, as buyers and sellers assess the new environment — against a backdrop of temblors that continue to shake Japan, he added.
"My guess would be that conversations are probably put on hold until there's more clarity in respect of the loss," Cornes said, recalling that very big events in the past have led to delays in the signing of contracts.
Before the quake, Cornes had not been looking for anything dramatic on rates from the renewals.
A sharp increase in premiums in the next renewals could herald a more rapid move to a harder market, Cornes said. "But wider than that, I think you'll see the market turn in the second half of 2011. So that's the time scale for seeing improvement."
Cornes said he believes it is too early for investors to begin putting capital into insurance companies. "You need to see the losses come through — some element of quantification," he said. "And also clarification that the reinsurance programs of the insurers do stack up and perform as they are expected to."
If these tests are met, Cornes said, institutional investors might be expected to move in and begin buying shares that have suffered. "Our view is that it would probably be quite a brave investor to start buying the nonlife sector at this point in time," he said.
The same calculations could be expected to be made by the private equity firms that have shown interest recently in the insurance market, Cornes said, arguing that such investors may be more likely to move at the end of 2011. Cornes, who expects solid estimates on the losses from the Japan quake to be made in a few months, said most insurers have already indicated their performance for the first quarter of 2011.
Cornes said the damage to insurers' share prices that followed the terrorist attacks on New York on Sept. 11, 2011 was followed by a relatively quick recovery and a capital raising.
"It happened very fast post 9-11," Cornes said. "I think it's probably not going to happen as quick post-Japan."