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Cold spots heating up

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Thursday 04 Oct 2012 – A relatively benign first half of the year resulted in an exceptional £1.53bn interim profit for Lloyd’s this month, but insurers have been warned not to rely on this continuing. In fact a new report released by Guy Carpenter explains that catastrophe risk has not diminished it may just have moved locale.

Last year’s catastrophes cost the industry over $100bn, the second most costly catastrophe year on record for insurers and reinsurers. But only a fraction of the losses came from the US, and the bulk of these were attritional severe weather claims and not the low frequency, high severity windstorm or earthquake losses typically associated with the market.   It is the steady increase in losses, in so-called industry “cold spots”, that is the focus of a report from reinsurance broker Guy Carpenter.   Globalised world   The report offers insight into catastrophe risks in developing economies and how they are likely to affect the insurance and reinsurance industry as companies target growth opportunities in these markets, including emerging Asia and Latin America.

It considers the impact of recent major natural events including last year’s Tohoku Earthquake, Thai floods and Christchurch Earthquake along with 2010’s Chile and Canterbury earthquakes.   “Unlike 1980 to 2010 the bulk of losses from 2009 to 2011 came from outside of the US, ” says David Flandro, managing director and global head of business development at Guy Carpenter.   “If you believe that the world is globalising and wealth penetration is increasing in places like India, South East Asia and China then the natural corollary is that insurance risk is increasing, ” he continues. “We don’t think the risk is as well understood in some of these emerging areas as was thought previously.”

“From 2007 to 2011 the parts of the world where reinsurance premiums grew the fastest was South East Asia, India and some of the other emerging markets, ” adds Flandro.   Developing economies currently account for around two-thirds of overall global economic growth. It is therefore likely the assets at risk in these countries will also grow in value.

The establishment of manufacturing facilities, strong infrastructure investments, land development, construction, growing personal wealth and increased international trade has driven demand for insurance. And as insurance penetration increases, the potential for sizable catastrophe claims also grows.

“The question we’re asking is how many more of these risks are out there?” asks Flandro. “Do we really understand what would happen if there was a Shanghai typhoon or a Brazilian flood or Romanian earthquake and where are we exposed and could we get blindsided?”   As international insurers and reinsurers look for growth opportunities outside the mature insurance markets this potential risk needs to be better analysed. But one of the difficulties with emerging markets is the lack of catastrophe models and other analytical tools.   “In some regions the underwriting data is pretty sparse and so in those areas we think local knowledge, underwriting acumen and the acquisition of good data and development of stronger catastrophe models in some of these areas should be important going forward, ” Flandro says.

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