Daily briefing: Friday - In the eye of the storm

Cities on the US East Coast are battening down the hatches in preparation for Hurricane Irene. The storm is expected to make landfall twice – once as a category 3 storm in North Carolina on Saturday, and once further north between New York and Boston as a category 2 storm on Sunday.

Why should the UK insurance industry care about an event 4,000 miles away – particularly one that, judging by current estimates, is certainly not going to result in record-breaking losses?

It could be the final straw that triggers a hard market in the global reinsurance industry, which in turn could have implications for primary insurance pricing in the UK.

The global reinsurance industry has taken a severe beating so far this year already. 2011 is already the costliest year for the global insurance industry on record, and it is far from over. The industry has been hit with multiple earthquakes in New Zealand, the devastating Tohoku quake in Japan, flooding and storms in Australia and New Zealand and tornadoes in the US Midwest.

The battle of the costs

The reinsurance industry has withstood the losses so far, but the feeling is that it can’t take much more punishment before capital bases start to be eroded and prices need to go up. Rates have already increased in loss hit areas, but further losses could prompt a more universal price hardening. Higher reinsurance rates in turn can mean higher insurance prices, as companies pass the cost on.

Of course, those responsible for buying reinsurance at insurance companies fight tooth and nail to ensure that they don’t get stung for losses that they have not helped incur, but this can be a tough battle. The industry usually requires that everyone pays to a certain extent for exceptional losses in certain areas.

Direct exposure

It should also be remembered that UK insurers’ exposure to global events is not confined to their reinsurance bill. It is known that Lloyd’s firms write a lot of international business, but companies such as RSA and Aviva are also exposed on the direct side. RSA, for example, took a £30m hit in 2010 from the Chilean earthquakes, and said large losses were £55m worse in H1 2011 than the same period last year because of the Japan, New Zealand and Australia events.

While events closer to home clearly have a stronger direct influence on rates, the impact of losses elsewhere should not be discounted.