Why premiums will keep falling despite the New Zealand quake

THE earthquake that devastated Christchurch in New Zealand last week also shattered insurance companies’ hopes of a quieter year for disasters than 2010.

The quake, which has claimed more than 100 lives and devastated historic and commercial city centre buildings, may cost the industry $12bn – more than double the $5.5-6bn insured cost of the quake that flattened parts of the city’s suburbs last September.

It’s an ominous sign for insurers with exposure to the Antipodean region, following a season of extreme events including flooding across chunks of Australia, cyclones in Cairns and bush fires at Perth.

“2011 is starting off as another active year for insured losses,” RBS analyst Joanna Parsons said. “The insurance sector is bound to be weaker on the news.”

The tremor also followed a busy past year for catastrophes. 2010 had the second-highest number of natural disasters on record, with 960 loss events that left the global insurance industry with a $37bn bill, according to Munich Re.

“The number of catastrophes documented in 2010 far exceeded the average for the last ten years,” Munich Re’s reinsurance chairman Torsten Jeworrek said.

But it is not yet clear whether insurers’ losses are high enough to push premiums up. “The issue…for the wider insurance industry is how many major catastrophe losses will occur in 2011, which has implications for year-end profit before tax, and at what point the ‘pain’ triggers a broad pricing re-rating,” Parsons said.

The insurance industry says it has spare capacity, and the large pools of capital firms have available to underwrite risk have upped competition for business.

The result is lower premium rates every year, including a 7.5 per cent fall in the 2011 renewals. Underwriters are clear that to return premiums to a growth path the industry needs a seriously large loss.

Peel Hunt analysts led by Stuart Duncan said of the earthquake: “While this event is very saddening and will be costly, it is not a market moving event, with estimates suggesting that losses of $50-$70bn would be required to move rates.”

And 2010’s figures pale into insignificance before natural disasters of that size.

The single most costly catastrophe for insurers on record was $71bn, from Hurricane Katrina, which devastated US states Louisiana, Mississippi and Alabama and virtually destroyed New Orleans. That event alone pushed 2005’s insured loss to $100bn – almost three times 2010’s level.

Hurricanes have caused seven of the ten biggest insurance losses in the past 40 years and far outstrip the damage done by earthquakes. Only the 9/11 World Trade Centre terrorist attack (a $22.8bn loss) and the Northridge earthquake to hit California in 1994 (a $20.3bn loss) come close to the impact of those storms.

Nonetheless, underwriters are still feeling the pinch from current disasters withseveral issuing profit warnings or full-year results affected by catastrophe losses.

Lloyd’s of London’s 52 managing agents took a $324m combined loss from New Zealand’s September quake, equivalent to 5.9 per cent of the total market loss, according to JP Morgan analysts.

Catlin’s full-year pre-tax profit fell by a third to $406m from $603m after taking a $218m catastrophe-related hit. Brit Insurance chief executive Dane Douetil on Friday blamed “higher than average catastrophes” for a 30 per cent drop in pre-tax profits to £119.2m from £171.3m in 2009.

Amlin lost $160m from September’s earthquake while Hiscox, which reports results today, took a £37m hit from that event and warned last month that snowy winter weather could cost it £16m. Outside Lloyd’s, Royal Sun Alliance said its 2010 losses were £255m higher than it expected due to extreme weather in Europe.

Yet the companies are well-capitalised enough to afford such losses. Despite the seriousness of the New Zealand earthquake, it will take much more to push up premiums across the industry.