Despite the massive natural disasters, global reinsurers recorded lower losses in 2011 than previous worst year of 2005 after growing their business

By Gareth Vaughan

Despite dealing with the biggest annual natural catastrophe related losses ever recorded last year, the world's major reinsurers have learnt from the previous biggest year on record - 2005 when Hurricane Katrina battered New Orleans - and suffered much smaller losses of shareholders' equity this time around.

The Basel, Switzerland-based International Association of Insurance Supervisors (IAIS), whose members include insurance regulators and supervisors from about 140 countries, says overall the insurance sector has weathered the challenging year of 2011, which included the massive March earthquake and tsunami in Japan and February 22 Christchurch earthquake, well. In its 2012 Global Insurance Market Report the IAIS says despite losses caused by an exceptional series of natural catastrophes in the Asia and Pacific region, non-life insurers and reinsurers seem to have recovered most of their capital over the course of the year.

The IAIS notes that Asia, Australia - which was hit by major floods in Queensland - and New Zealand accounted for almost two-thirds, or 61%, of insured losses caused by natural catastrophes during 2011. That compares with an average of 18% annually from 1980 to 2011. It notes that the 18% long-term average is broadly in line with the share of global insurance premiums paid within Asia, Australia and New Zealand. Here in New Zealand premiums charged by insurers have been increasing post the Christchurch earthquakes with some rising up to 50%, and the latest increases coming from Tower.

IAIS says reported economic losses stemming from natural catastrophes topped US$350 billion (about NZ$423 billion) last year, ahead of the previous record annual high of US$176 billion in 2005, with the disasters primarily coming in high and middle income countries. Losses from last year's Japanese earthquake and tsunami alone are put at US$210 billion.

Despite record high economic losses, insured losses last year came in at US$105 billion, behind the US$120 billion recorded in 2005 when the United States Gulf Coast was also hit by hurricanes Rita and Wilma.

And the 2011 events had a smaller impact on reinsurers shareholders' equity.

"In 2011 the majority of companies suffered an adverse impact of 20% and below. A reinsurance company that suffered a reduction of 40% in shareholders' equity marked the maximum impact in 2011," the IAIS says.

"In 2005 the majority of reinsurance companies lost 30% and more of their shareholders' equity. Within that group were four companies for which the shareholders' equity deterioration exceeded 60%. One reinsurer lost almost 100% of equity capital. The necessity to improve catastrophe modelling techniques was among the lessons learned from the extreme events in 2005."

"It is likely that these improvements contributed to the better performance (ie reduced losses of equity capital) of reinsurance companies in 2011," adds the IAIS.

Reinsurers lost more shareholders' equity through the global financial crisis in 2008 than they lost due to the 2011 catastrophes. That said, reinsurers' average return on equity was put at 5.1% for 2011, down from a  peak of 16.5% in 2007.

The IAIS says its review of gross premiums written by selected large reinsurers shows that over the last five years they've steadily grown to more than US$180 billion last year from US$157 billion in 2007, representing a 19% increase, which can be used as an estimate for overall market growth. European reinsurers were the major movers, increasing their gross premiums written by 22% to US$120 billion from US$98 billion.

Aside from the disasters in New Zealand, Australia and Japan, there were US$31 billion losses from floods in the US, and US$40 billion of flood related losses in Thailand last year. Meanwhile, the Reserve Bank, now prudential supervisor of the insurance sector, says damage from the Canterbury earthquakes is likely to be equivalent to about 10% of Gross Domestic Product (GDP), compared with around 3 to 4% of GDP in the case of the Japanese earthquake and tsunami. The Reserve Bank puts the Christchurch rebuild costs at about NZ$20 billion, excluding disruption costs, and insured losses at about NZ$30 billion.