Large Losses From New Zealand Quake May Not Create Hard Insurance Pricing MarketPublished on February 25, 2011 at 9:56 am
According to the latest reports from New Zealand, the death toll from Tuesday’s 6.3 magnitude earthquake has reached 113 and is expected to increase further as the grim recovery efforts proceed in the coming days. In terms of financial damage, the quake is now expected to result in insured losses of up to $12 billion. The disaster may prove to be among the top 10 most costly natural disasters once the final financial toll is known. Although the turmoil in Libya and the related spike in oil prices has moved the New Zealand story off the front pages of many newspapers, this disaster will have widespread implications in the months ahead.
Tuesday’s earthquake was officially an aftershock of a 7.1 magnitude earthquake on September 4, 2010 which caused property damage but did not result in any fatalities. Many of the buildings destroyed in Tuesday’s aftershock were initially damaged in the earlier quake. This has led to some debate over whether the two quakes will be considered separate insured events which can be important in cases where primary insurers obtained reinsurance. If this week’s quake is considered to be part of the same event that led to September’s larger quake, reinsurance may cover more of the damages.
One important question involves whether the disaster will lead to a harder pricing environment going forward. Insurers have been mired in a soft pricing market for several years with no apparent end in sight. According to several industry experts, the pricing environment is unlikely to harden based on a $12 billion event. Even a $50 billion event may only “give the market pause” for a year or so. What could result in a harder market? According to the quoted industry participants, only a large earthquake in a larger city or a major terrorist event is likely to have a lasting impact.
Berkshire Hathaway will release 2010 earnings tomorrow and it will be interesting to see whether any “subsequent event” disclosures are included in the 10-K related to this week’s earthquake. In Berkshire’s Q3 2010 report, the company indicated that General Re incurred $304 million of catastrophe losses primarily due to the Chilean and New Zealand quakes and storm related losses in Europe, Australia, and New England. If this week’s event in New Zealand is material enough for Berkshire, we may expect to see some information regarding anticipated losses in the 10-K.
Disclosure: Long Berkshire Hathaway.