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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

The Magnitude 7.2 earthquake that erupted on Sunday, Apr. 4, below Baja California most likely will not impact the global reinsurance business as much as feared. According to a loss estimate released on Monday evening by catastrophe modeling firm Eqecat Inc., insured losses should not exceed $300 million, and most economic damages will have occurred in Mexico, not in Southern California.

The biggest headline from Willis Re's reinsurance renewals report from last week was that the reinsurers' $16 billion in total CAT losses in the first quarter was "unprecedented." Mother Nature unleashed a beat down, from the Chilean earthquake to the European windstorm Xynthia, to the massive snows and rains in the Northeast United States.

"Following the historically high level of losses during the first three months of 2010, it is likely that, for the first time in a number of years, the first-quarter 2010 reinsurance industry results will be worse than those of their primary insurance company clients," wrote Peter C. Hearn, CEO of Willis Re, in the opening to the report.

Going forward, this does not bode well for primary insurers or their risk manager clients. Why? As Hearn explained in the Willis report, the largest losses occurred in small markets, where reinsurers will not be able to make up losses in future premiums. Reinsurers might have to seek rate elsewhere, and then primary markets could trickle down the increases to commercial insurance buyers.

Is this guaranteed?

"It's a little early to tell on some of these CAT losses how they will play out in the retail arena," said Duncan Ellis, the New York-based U.S. property practice leader at global brokerage Marsh.

Ellis described the property insurance market as "fragile." Any major event that hits U.S. shores "could change the market," he said.

"I think the big issue out there is what we're going to see in the wind season," he added, alluding to hurricane forecasts from the likes of NOAA, Colorado State University and Accuweather that are calling for an above-average hurricane season in the Atlantic basin.

Even if reinsurers pass the buck, so to speak, before or after the hurricane season, insurers don't necessarily have to pass along the costs to their customers. Primary insurers could decide to absorb the reinsurance increases or purchase less reinsurance, explained Ellis. Or they could adjust their aggregates and offer less capacity in certain CAT-prone areas. They could also raise rates and do all of the above too.

In the meantime, risk managers should enjoy the current property insurance market. Despite their dramatic first-quarter losses, reinsurers have yet to react, according to the Willis Re report, as well as renewal analyses from the two other major reinsurance intermediaries, Aon Benfield and Guy Carpenter & Co. According to the Aon report, April 1 renewals were seeing 5 percent to 15 percent rate reductions, while Guy Carpenter saw similar rate decreases and "plentiful" capacity for U.S. prop-CAT reinsurance.

Ellis has seen fairly abundant capacity and strong competition among carriers on the primary side, particularly for non-catastrophe business. On the excess catastrophe side, pricing has been flat or even slightly down a percent or two, he reported, though primary CAT can still be "where the challenge is."

Risk management professionals contacted also are seeing robust capacity and no impact on prices. Lee Hoffman, for instance, helped one client get a 5 percent reduction on a $250 million property program in its July renewal, working as its independent ERM consultant. (Hoffman also serves as risk manager at the 1st Source Insurance agency.)

Still, Hoffman, like Ellis, sees a market that could turn, though Hoffman describes the market as "jello."

"We see it quivering, it just hasn't melted yet," he said.

April 6, 2010

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