Friday, September 14, 2012

The State of Catastrophes and Catastrophe Reinsurance

The insurance industry not too long ago developed an efficient way to address insured disasters through the creation of the Property Catastrophe market.  In other words, direct insurers who pay the insured losses resulting from catastrophes and disasters are able to mitigate their loss payments through the purchase of specialized reinsurance meant to cover extraordinary property losses.  This is the Property Cat market.

The Property Cat market grew when the wind blew hard and knocked down the surplus of the direct property insurers in the Gulf Coast and Eastern United States.  Bermuda became the home of many of these Property Cat reinsurers and are often known by their year of incorporation or their "class year."

Recently, Aon Benfield, a world wide reinsurance broker, issued a study on the Property Cat marketplace.  You can find the study here.  The study provides a very positive review of the Property Cat market as high quality credit protection for direct insurers.  Here's one quote from the opening of the paper entitled "Credit Risk of Property Catastrophe Reinsurers."

"Since 2000 the reinsurance industry has paid more than USD150 billion in catastrophe claims.  Over the same time horizon only eight reinsurers have gone insolvent due to
catastrophe losses, and those eight represented less than 1 percent of global reinsurer capital. Further, the insolvent companies have settled more than 99 percent of their claims. As a result realized credit losses have been less than 10 basis points, a rate consistent with ‘AA’ corporate bond default rates."

The paper describes in great detail the credit value of the Property Cat market and compares the market over various years.  How is the Property Cat market doing in the face of Hurricane Isaac?  Time will tell, but early reports indicate that the insured losses will not be a problem for the insurance industry even with its estimated $2 billion price tag.

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