Floods force Asian insurers to reappraise risks in the Thai markets

Some reinsurers are already paying lower reinsurance commissions and demanding higher premiums, S&P said in a circular yesterday.

They are also tightening terms and conditions, such as introducing event limits on proportional treaties. An event limit is the maximum a reinsurer will pay in a catastrophic event.

As Thailand is no longer considered a safe zone from catastrophes, the study of catastrophe risk exposure is expected to be enhanced to secure both adequate pricing and reinsurance protection.

While costs have increased for catastrophe reinsurance cover, non-catastrophe insurance rates have remained flat.

“Having experienced the losses associated with unlimited event coverage, reinsurers are re-evaluating their risk exposure in other markets, especially in Southeast Asia, where event limits do not exist for some markets.

“Insurers and reinsurers with capital stress are managing the risk in their portfolios by using more reinsurance …or changing their investment or business mix,” it said.

 

New reinsurers enter fray

While some international reinsurers have withdrawn from the Thai market, newcomers including Fairfax Group and Berkshire Hathaway Group are entering the market to take advantage of the increase in premium rates that usually follows a large catastrophe. 

The ratings agency does not expect to know the full extent of losses until the end of the second quarter, as loss assessment remains underway. It estimates the current gross losses for insurers globally at about $16 billion-$18 billion, in line with the market’s estimate of ultimate losses of $15 billion-$20 billion.

The ultimate flood-related losses could be higher than the currently reported losses, given insurers’ recent actions to revise loss estimates upwards after site visits, in some cases by as much as triple the initial estimate. This will create some level of a domino effect because of co-insurance contracts among local insurers in the Thai market and the associated reinsurance and retrocession to the local and international markets. It will take time for losses of these inter-linked contracts to emerge.

“Insurance losses have been so high in the Thai insurance industry that it has changed our opinion on those markets being catastrophe-remote. We expect the terms and conditions on catastrophe reinsurance, which is mostly covered under a separate agreement from ordinary policies, to continue to tighten.

“We also anticipate that catastrophe reinsurance capacity will remain tight with reinsurance pricing on catastrophe perils increasing significantly,” S&P said.

The net losses from the Thai floods for Japanese insurers are considerably higher than those from the earthquake/tsunami in Japan in March 2011. Related losses amounted to 211 billion yen, or $2.7 billion, it added.