Fitch Sees Chile Quake Losses Unlikely to Impact P/C Insurance Ratings

March 5, 2010

Based on preliminary analysis, Fitch Ratings said it believes that the Chilean P/C insurance industry “will likely be able to absorb losses from the earthquake and Tsunami that hit the central-south part of Chile on Feb. 27.” However, Fitch added that “industry profitability ratios will be negatively impacted, and the 2010 fiscal year could end with net losses and higher leverage ratios.”

Fitch cited estimates from modeling firm AIR Worldwide and others, that the total expected losses may equal $15 to $ 30 billion, or 10 percent to 15 percent of Chile’s GDP (See IJ web site – ]. However, Fitch noted that insured losses are “expected to be a fraction of those total losses at $2 billion to $8 billion. Consequently, only the lowest estimates of insured losses ($2 billion) would be similar to the industry reserves ($1.3 billion) and equity ($0.62 billion) as of September 2009, excess that will be covered by reinsurance protection. Even more importantly, Fitch believes that net retained insured losses (i.e. after cessions to international reinsurance companies) should remain manageable relative to industry capitalization.”

Fitch expects that “a vast majority of insured losses will be borne by reinsurance companies located outside of Chile, and so Chilean insurance companies will be highly reliant on the willingness and ability of reinsurers to honor their payments in a timely manner. Timely payments will be necessary so as to avoid both liquidity problems (caused by gaps in timing between claim payment by insurers and collections from reinsurers) or losses to capital (due to bad debts).” Fitch added that “historically reinsurers have honored their obligations in a timely manner in the event of major catastrophes and that total losses from the earthquake and Tsunami should be relatively easily absorbed by the reinsurance industry as a whole, even in light of major European storms the same weekend as the Chilean earthquake.”

Fitch also described the Chilean P&C insurance market as being “regulated by one of the more advanced regulatory frameworks in Latin America,” adding that it is “a relatively concentrated market, in which foreign primary insurers hold major equity stakes.

“Primary insurance companies including RSA, Mapfre, Chilena (Zurich Group), Liberty Mutual, Cardif, Chartis and Santander, are important players in this market, while locally owned insurance companies (sometimes associated with large local financial groups) make up the remainder of the list of the 10 largest insurance companies in the country, managing around 87 percent of total collected premium as of September 2009 (around $ 2.2 billion projected for FY09).

“The significant presence of strong international players in the primary insurance market in Chile suggests the ability and propensity to provide support to its subsidiaries, should it be required.

After analyzing the earthquake, Fitch indicated that “auto insurance is the largest portion of the industry’s retained premium at around 37 percent of the total,” as is the case in many countries. Fire insurance, which is the line of business that includes earthquake and natural disaster coverage, “makes up another 19 percent.

“However,” Fitch continued, “Fire and its additional coverage represent the bulk of maximum losses exposure (70 percent of total). As noted, net retention levels across the system tend to be modest, with maximum retention levels per event and catastrophe under 5 percent of total equity, with several companies managing limits closer to 2 percent of its equity, depending on each business lines. Despite such low retentions, Fitch also recognizes that in the case of particularly large catastrophic events like this, there is a risk that gross losses could exceed reinsurance coverage.”

The rating agency added that it “plans to address this potential exposure as more information is provided from the rated entities.”

Despite expectations of very large gross losses, Fitch said it “expects that the ratings currently assigned to P&C companies in Chile may not be significantly affected. Current leverage levels are relatively lower than other markets in the region, implying good capital-reserves adequacy; however, Fitch expects an increase in industry leverage ratios at least in the short term, but always limited to not exceed the maximum regulatory level of five times.

As noted, this commentary reflects Fitch’s initial and preliminary assessment, and there is a chance actual results could differ materially from these expectations. Fitch plans to keep gathering information from its rated universe in the P&C market as it becomes available and will reassess the situation as needed. Fitch will provide additional comments should its views change for either the market as a whole or for any individual company.”

Source: Fitch Ratings –

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