Natural disasters deliver jolt to insurance thinking

To this shattering start to the year, the US windstorm season, the build-up of hurricane conditions seen as starting every June 1, will be added. Profits at Lloyd’s, to which many ports look for their insurance, were down 43% in 2010, to £2.2bn; and syndicates have been releasing money from reserves to boost their results. Many primary insurers began 2011 by buying less reinsurance protection, which may turn out to have been a short-sighted decision.

Three big companies alone – Munich Re, Catlin (in terms of premium written, the largest managing agent at Lloyd’s) and XL Group – had already been struck by a total of $1.7bn of catastrophe losses before the tsunami crashed towards a part of the Honshu coast which was host to an estimated $24bn of exposures.

Total insured loss in Japan has been estimated by computer models at anywhere from $12bn to $35bn. Although much will be borne by Japanese domestic insurers, the bill for natural catastrophes is nearly always dearer than initially forecast.

Even the setback represented by these massive costs is unlikely to change the tenor of the insurance market as a whole. The market recapitalised after its 2005 hurricane losses and the 2008 financial crisis so will be in a position to absorb the admittedly large hit.

Port operators may be under pressure from underwriters on two fronts, however. First, the Japanese catastrophe will reinforce the determination of underwriters to charge dearer premiums for ports in earthquake and windstorm zones.

Secondly, with civil unrest and international war in the Middle East and North Africa, the question of business interruption cover for ports and terminals will come into focus, for the eligibility of claims is difficult to assess, and underwriters need verifiable information. Demand from countries including Egypt for this type of cover is seen as rising, and prices may rise accordingly.

Contingent (secondary) business interruption is a worry for ports, and hard to define. Trade has been hit for instance by import bans on Japanese goods which might have been contaminated by radiation leaks from the Fukushima nuclear complex; and by shutdowns in the motor industry because of a shortage of components, and by sourcing difficulties in the electronics sector.

It looks as though insurers are going to tighten up the wording of business interruption clauses. Swiss Re, in a study by its sigma research arm, suggested there should be a new look at conditions, after its surprising finding that half the total payouts following the Chile earthquake of 2010 were for trade disruption claims.