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Insurance and Reinsurance Issues Arising out of Natural Catastrophes July 2012

Market Insight
15 July 2012

2011 saw an unprecedented sequence of natural catastrophes including the Christchurch earthquake, the Japanese earthquake and tsunami and the floods in Thailand. In addition to the devastating loss of life and the impact on local communities, these events have also had a significant impact on the global insurance industry with insured losses estimated at more than US$110 billion. In this article, we will consider the immediate financial impact these events have had on the industry, as well as some of the insurance and reinsurance issues that commonly arise in the context of claims resulting from natural catastrophes.

Financial impact

Insured losses arising from natural catastrophes in 2011 are estimated at US$110 billion, making it one of the most expensive years on record for the insurance industry. Despite the immediate impact these losses had on insurers and reinsurers, the share prices of a number of Lloyd’s businesses and European insurers have performed well since and continue to do so in 2012. This is largely down to a combination of much lower catastrophe claims in 2012 and an increase in premiums as insurers and reinsurers look to replenish lost capital from previous years. Catastrophe claims for the period up to the end of May 2012 have been estimated at approximately US$6 billion, compared to a figure of US$75 billion for the same period in 2011. Meanwhile, rates rises of 2-3% have been reported by some insurers, with reinsurance premiums up by as much as 5-10% and further increases expected. In addition, those regions or countries that are now perceived as potentially more exposed to natural disasters than previously, have seen rates increase by as much as 30%.

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Insurance and reinsurance issues

Invariably, given the complex nature of natural catastrophes, issues can arise when insureds come to make claims under their property, business interruption, contingent business interruption, liability and directors and officers’ policies. The fact that the potential claims involved are so high means that it is perhaps inevitable that questions will be raised regarding the application of the specific facts (leading up to, during and following the catastrophe) to the relevant insurance or reinsurance policy wordings. In this section we will consider some of the most common questions which may arise in this context.

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Specific reinsurance issues

In addition to the issues discussed above which arise at the insurance level, it is also important to consider the issues facing reinsurers, since payment of claims at the reinsurance level may be key to payment of the direct insurance claims.

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The huge losses resulting from the natural catastrophes in 2011 and the myriad of issues that can arise when insureds come to make claims under their insurance and reinsurance policies, serve as reminders to both insureds and insurers of the importance of fully evaluating their potential exposure to natural catastrophes. It also highlights the importance of ensuring that the relevant policy language is sufficiently clear and concise, so that insureds know the cover is adequate for their business needs and insurers can determine precisely the potential scope of the cover they are providing.

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John Court
Global Director of Information Technology