Can insurers cope with a perfect storm?

They've had it easy in recent years but the salad days are over, says Nick Clark

A devastating earthquake in Chile, wind storms across Europe, and the disastrous oil spill in the Gulf of Mexico have contributed to one of the worst first halves for the insurance industry in a decade. This has led to questions over whether the shine has finally come off the catastrophe insurance industry, after an unprecedented purple patch.

The above are among the 440 disasters that are expected to cost companies that provide catastrophe insurance and reinsurance upwards of $22bn (£14bn) in the first six months of 2010, more than double the average first-half cost since the turn of the century, according to Morgan Stanley analysts. Conditions could well get worse this year, as hurricane season continues until November. There have been only two storms since the season started in June, but the National Oceanic and Atmospheric Administration predicts up to 12 hurricanes. Possibly half will be major.

This will interest more than US insurers, as several members of Lloyd's of London are exposed to wind storms in the Gulf of Mexico as well as Europe, Morgan Stanley found. Two, Amlin and Hiscox, reported first-half results yesterday, which showed the effects of what Amlin called "record catastrophe losses" together with, falling premiums and volatile investment markets.

Its pre-tax profits fell from £177.1m in the first six months of 2009 to £107.6m a year later because of the "high industry catastrophe losses relative to the benign claims environment of 2009". It suffered net ultimate losses for major catastrophe related claims of $190m, triple the figure disclosed a year earlier.

The earthquake that hit Chile in February, the fifth-strongest since 1900, proved the most costly disaster for insurers. The industry's total insured loss stands at $8bn but is expected to rise further. Jon Hocking, analyst at Morgan Stanley, said that "any further developments in losses are likely to fall on reinsurers as most primary insurers would have exhausted their exposure".

Also in February, Windstorm Xynthia battered Europe causing insurers a loss of $3bn. Other natural catastrophes highlighted by the UK insurers included hailstorms in Australia, which hit Amlin by $18m, the earthquake in Baja California, Mexico as well as the Icelandic volcanic eruption. BP's loss of the Deepwater Horizon rig also marks the worst loss in the energy market since the Piper Alpha disaster in 1988. Catastrophe exposure prompted Hiscox profits to fall from £141.4m in the first half of last year to £97.2m.

Catastrophe cover has been a hugely profitable line of business for insurers over the past few years, one market expert said yesterday. After Katrina, premiums jumped, while the rest of the market was relatively unaffected. While insurer's short-term profits are hit by payouts in the wake of a catastrophe, "they tend to get better margins the following year because premiums get pushed up," Tom Dorner, analyst at Oriel Securities, said. The enthusiasm with which many insurers pursued such polices prompted senior executives at Lloyd's to admit concerns over the risk exposure at the end of last year. Several months later, Richard Ward, the chief executive of Lloyd's said: "It isn't overstating the situation to say that the insurance industry is facing a potential perfect storm this year."

The business, which by its nature is unpredictable, has, however, become more sophisticated in recent years. Charles Philipps, chief executive of Amlin, said: "Reinsurance has become pretty disciplined. The models have become much more honed." Many insurers turn to companies such as RMS and AIR Worldwide for modelling technology and consulting. The risk management has improved with Lloyd's introduction of the Franchise Performance Directive in 2002 and Europe's forthcoming "Solvency II" directive is expected to add further security.

The Lloyd's insurers were also protected from the catastrophe payouts by diversifying their business models. Mr Dorner said 2010: "Saw the worst first half on record for catastrophe losses. However, the Lloyd's insurers have mostly delivered profits in the first half because of their diverse portfolios. If there is a major disaster in the second half it could become an issue for the insurers."

Amlin said that the difficult backdrop was "exactly the type of environment that we expect our focus on gross underwriting performance, the quality and diversity of our portfolio and our well-proven management to prove advantageous". However, it cautioned: "Future reinsurance market trends will be affected, as always, by the level of catastrophe activity in the Atlantic, Pacific and European windstorm seasons during the second half of the year."

But despite the hefty losses in the first half, premiums are only expected to rise in Chile. It would take a really big disaster to change pricing, right across the industry. Katrina (which did just that) is estimated to have cost the industry $50bn, while 9/11 cost between $25bn and $30bn. Robert Childs, chief underwriting officer at Hiscox, said: "To really significantly change the market, there has to be a large loss in one of the two major buying zones. For us that would be in the US or Europe. Others will also be heavily affected by Japan." Amlin noted premiums had fallen in the first half and many believe the trend will continue into next year. Mr Dorner said that there was still too much capital in the industry. And this is serving to put the squeeze on insurers.

Yet, despite the gloom, catastrophe insurance and re-insurance remains lucrative. Amlin's falls still only brought the price slightly off the peak of 2007. "Rating levels for catastrophe reinsurance remain attractive and sufficient discipline appears to exist in the reinsurance market to ensure that we do not return to unacceptably low levels of pricing," it said. Oriel's Tom Dorner said: "Pricing is still not far off historic highs, but it will come under pressure if there are no further losses in 2010. For now margins remain attractive though."

Start your day with The Independent, sign up for daily news emails
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
news
PROMOTED VIDEO
News
i100
Sport
Robin van Persie scores the third for Manchester United with a perfectly-guided header
footballLive! Chelsea vs West Ham kicked off 10 Boxing Day matches, with Arsenal vs QPR closing the action
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
News
i100
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
Sport
football
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all