Insurance-Non-Life: No Outsized Impact from Tsunamis Expected - USA - 5pp
Highlights:
* The devastating tsunamis that emanated from a huge earthquake off of the coast of Sumatra and resulted in a tragic loss of life and property will not have a dramatic impact on the global insurance and reinsurance industry, in our view. Much of the property in many of the areas (i.e. Sri Lanka and India) that were hard hit by the waves was uninsured and property values in these areas are low relative to more developed nations. In addition, from what we understand, earthquake/tsunami coverage is not offered as a standard part of property insurance in many markets.
* Estimating industry-wide losses from this event is impossible at this time. Making the assessment difficult is the fact that there are no developed catastrophe models for this type of event in the regions that have been impacted. Obviously, access to the impacted areas will be limited for some time. The largest insured losses will likely come from the tourism industry in places like Phuket, Thailand and the Maldives. Part of the claims from the hotels and resorts in these areas will be made against local insurance companies while others will be made by global hotel operators against insurers outside of the impacted regions.
* U.S./Bermuda insurers have a very limited market share in the effected areas. Few companies in our universe show up in the top ten in market share in India, Sri Lanka, Indonesia and Thailand, although several European companies have a presence in these countries. Among U.S. based companies, AIG (AIG, B-1-7, $66) appears to have the most significant share, although AIG has stated that it will "will not have significant business exposures or losses" from the earthquake/tsunamis. We have included market share tables below for four countries.
* The local insurers will likely have significant reinsurance coverage. Accordingly, we believe that losses among the publicly traded companies in our universe will be borne largely by reinsurers. The only two estimates we have seen from reinsurers have come from Munich Re, which suggested that its potential exposure was less than $100 million and Hannover Re which said it expected less than $10 million in tsunami-related losses. We would expect other property reinsurers to have some Tsunami-related losses, although that this early stage based on the discussion above, we would expect these losses to exceed a normal level of catastrophe losses in the fourth quarter. We note that our estimates do include a certain level of catastrophe-related losses. Those companies that could be impacted include: RenaissanceRe (RNR, C-1-7, $52), IPC Holdings (IPCR, B-2-7, $44), ACE Limited (ACE, C-1-7, $42), XL Capital (XL, B-1-7, $78), Endurance Specialty (ENH, C-1-7, $34), Platinum Underwriters (PTP, C-1-7, $31), AXIS Specialty (AXS, C-2-7, $27) and Arch Capital (ACGL, C-1-9, $38).
* Given the inability to effectively model Tsunami risk, most reinsurers do not explicitly model this risk into their pricing and risk management programs. Swiss Re has stated that it "does not explicitly model the tsunami risk, but includes a tsunami exposure charge aligned to the modeled earthquake shock losses". The unexpected event of this weekend could cause reinsurers to attempt to price tsunami risk into their catastrophe reinsurance products, resulting in higher prices for regions where tsunami are possible. We would expect such re-pricing to have only a marginal impact on the overall reinsurance market.