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Reinsurance coverage for natural disasters in most major markets of the world is insufficient, according to a study by a leading reinsurance company.
The study also says catastrophe reinsurance rates are lower than they were in 1994 and could fall further in the short term as long as there are no major natural disaster claims.
"Prices are now moving into a range in which it will be very difficult for the rate of return required by reinsurers to be met. In the long term, the unfavorable price situation will result in reinsurers with poor capitalization and little diversification being squeezed out of the market," warns the study by Swiss Reinsurance Co.'s economic research unit.
The report, one of Swiss Re's Sigma series, concludes that reinsurance coverage in heavily populated areas is inadequate when measured against "reference losses," or insured losses caused by low-frequency major natural disasters, such as one-in-100-year storms or one-in-500-year earthquakes.
In the case of extreme events, insured losses could threaten insurers' solvency.
The report warns that in certain markets, losses could be so great that insurers would need to raise additional equity capital to avoid being taken over, seek state support or go bankrupt, leaving policyholders with unpaid claims.
The study covers the United States, the United Kingdom, Germany, France, Canada, Japan, Australia, Belgium, Italy, the Netherlands, Israel, South Africa and Mexico.
It shows that while buyers over the past few years have been purchasing more catastrophe excess-of-loss reinsurance coverage, known as CatXL coverage, premium volume has not risen sharply.
During 1997, ceding companies in these countries bought CatXL limits totaling $52.9 billion, up 31% from 1994, while the premium volume fell 19%, to $2.8 billion.
The fall in premium volume can be explained by an increase in retentions and a drop in prices for CatXL coverage. The report says that in the 13 countries covered, during 1994-1997, CatXL rates fell an average of 33%. For example, CatXL rates fell 22% in the United States and 48% in South Africa.
The study also shows that during the same period the average margin -- realized price less risk premium -- in CatXL fell to 0.5% from 3.6%.
Of the 13 countries studied, the United States accounts for by far the biggest share -- one-third -- of 1997's CatXL coverage. Among individual countries, the United Kingdom holds the second-largest share, 11%, while combined European coverage represents 27%.
Of the $2.8 billion of CatXL premiums paid in 1997, the United States accounted for almost half. Europe again represented 27% and the rest of the world 26%.
The study, Sigma No. 7, "Too Little Reinsurance of Natural Disasters in Many Markets," is available free from Swiss Re Economic Research, 200 Park Ave., 16th Floor, New York, N.Y. 10166; 212-973-5194, fax: 212-973-5050; or from Swiss Reinsurance Co., Economic Research Section, P.O. Box 8022, Zurich, Switzerland; 41-1-285/25/51; fax: 41-1-285/47/49.