Fitch Sees Tsunami Repercussions Varying Across Insurance Sector

December 29, 2004

Fitch Ratings has issued a bulletin indicating that it “expects insured losses stemming from the recent Southeast Asian earthquake and tsunami to affect the Asian primary insurance market and the worldwide reinsurance market including markets centered in Singapore, London and Bermuda.” Reports as of Wednesday put the death toll from Sunday’s killer earthquake and tsunami at around 60,000, with many people still reported missing in several countries.

The rating agency added: “While US primary insurers are not likely to incur material losses as the result of this event, some US primary insurers may have modest exposure on property owned by multi-national companies insured through policies issued by US carriers.”

After giving details of the undersea quake that caused the massive tidal waves, Fitch stated: “At present, there are no reliable estimates of the insured losses resulting from this earthquake. However, Fitch notes that large economic losses will not necessarily result in large insured losses depending upon the extent to which insurance is in use in these locations.

“At present, it appears that a significant portion of the property damage is not covered by insurance, though that varies from country to country. To-date, none of the major catastrophe modeling firms (AIR, EQE and RMS) has issued any insured loss estimates.”

In addition to property damage claims, Fitch said it believes “the event also has the potential to generate significant life insurance and travel accident claims. It will likely be some time before all of the life insurance claims are submitted as large numbers of people remain unaccounted for.”

The rating agency also noted that “because the earthquake and resultant tsunami occurred in December, the fourth quarter 2004 earnings of Asian primary insurers and reinsurers worldwide will be affected. However, the event occurred too late to affect Jan. 1 reinsurance renewal pricing. Nonetheless, retrocessional reinsurance (reinsurance purchased by reinsurers) pricing could be affected and many retrocessional policies renew on March 1.”

Fitch added that it “does not believe any of its rated catastrophe bonds were triggered because the epicenter of the quake occurred outside of the risk areas.”

Addressing the cause of the disaster, Fitch noted that “large earthquakes are rare, rarer than large hurricanes. Therefore, this quake will provide important data to the catastrophe modelers and may result in revisions to their earthquake models. If this results in increased estimates of loss frequency or severity, the effect may ultimately be seen as increased rates for insurance and reinsurance.

“Losses to some regional insurers may be large. This may spur increased demand for finite risk reinsurance products that provide current capital benefits at the cost of reduced future earnings for the purchasers.”

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