Best Comments on Katrina’s Impact on the Global Reinsurance Industry

As the Reinsurance Rendezvous opens in Monte Carlo, A.M. Best Co. has issued a comment on the possible impact of Hurricane Katrina on the global insurance industry.

Many of the biggest European companies – Munich Re ($493 million), Swiss Re ($500 million) and Hannover Re ($308 million) (See IJ Website) have made preliminary loss estimates. Best said, however, that it “believes that it may take longer to fully assess the extent of damage in the Gulf of Mexico region and that it could be significantly higher than initially anticipated (with overall insured damage estimates currently ranging from $20 billion to $60 billion).” Swiss Re has already increased its estimates by $700 million (See related article).

Best noted that Hannover Re has already said the storm would impact earnings forecasts. That, said the rating agency, could mean that “earnings for reinsurers with large natural catastrophe exposure could come under pressure in 2005, not only from higher than anticipated claims relating to Katrina, but also from new claims arising from the still ongoing hurricane season, with some natural catastrophe experts estimating that up to 10 further Atlantic hurricanes may occur this year.”

Best also noted the additional losses the reinsurers have suffered from other natural catastrophes this year, “such as storm Erwin in Europe in January, floods in Austria, Switzerland and Germany in August, typhoons in Japan, and flooding in the South of France, although this has been partially covered by the French state-owned reinsurer, CCR.”

Best indicated that the frequency of natural catastrophes has accelerated in the last decade. “In the last few years, reinsurers have encountered a number of events that were predicted to occur only once in a hundred years, such as the storms Lothar and Martin in 1999, the floods in Germany in 2002 and last year’s hurricanes in the United States. A.M. Best believes that potentially higher volatility of underwriting results could make it increasingly difficult for reinsurers to forecast earnings, potentially alarming shareholders and investors, thus negatively impacting reinsurers’ financial flexibility,” said the bulletin.

Not all of the effects are negative. Best said that in the short term, “the financial impact of Hurricane Katrina could positively influence the forthcoming renewal season as reinsurers remain more inclined to stick to pricing targets.” Best said that although there is a clear downward trend in the underwriting cycle, “the accumulation of floods, hurricanes and typhoons may alleviate the anticipated pressure on premium rates, especially in property where ample capacity has been available.”

Turning to a discussion of possible ratings downgrades, Best said, “the ratings of reinsurers with a significant exposure to Hurricane Katrina could be downgraded.” In general Best expects P/C companies “to maintain risk-adjusted capitalisation supporting an existing rating, even after a 1/250 years earthquake or 1/100 years windstorm event. However, for reinsurers with limited exposure to Katrina, pressure could arise from an accumulation of adverse developments, such as further significant claims from natural catastrophes or necessary reserve strengthening, resulting in a deterioration of reinsurers’ risk-adjusted capitalisation.”

For the future, Best indicated that it “believes that the stability of ratings will largely depend on a reinsurer’s ability to effectively manage its exposure to more frequent natural catastrophe risks. In addition, reinsurers will be expected to generate sufficient earnings to absorb potential adverse loss developments from previous—as well as current—underwriting years while continuing to build their risk-adjusted capitalisation to withstand any potential sharp falls in the underwriting cycle.”