Insurance company share prices have fallen sharply this week as estimates of the cost of Japan’s earthquake and ensuing nuclear emergency have risen. Shares in the global “full-line” insurance sector were down nearly 6 per cent in the five days following the earthquake, while the global reinsurance sector fell more than 4 per cent.
Although much of the cost will be carried by the Japanese government and local Japanese insurers, reinsurers including Swiss Re and Munich Re, and even UK insurers – such as Aviva and Prudential – have seen their shares hit as concerned investors sold out of their holdings.
Shares in insurers in the Lloyd’s market, including Catlin, Hiscox and Novae, also fell this week.
Analysts disagree over whether the scale of loss will have a major impact on the global insurance and reinsurance markets and cause the cost of all policies to rise.
“It is clear that some of our major insurers have large exposures in Japan, and are therefore likely to be impacted at least on their Japanese operations,” says Brian Brown, general insurance consultant at Defaqto. “It is possible that these insurers might seek to replace some of those losses with increased premiums for other customers, which could trickle down to UK customers.”
Malcolm Cooper, product director at Legal & General, says that even if reinsurance rates were to rise globally, the cost passed on to UK customers would be minimal. “Reinsurance premiums are a cost to us that we build into our premiums, so we have to pass on that cost,” he explains, “But it’s a small percentage.”
Any impact on general insurance premiums in the UK will take a long time to trickle down, says Graeme Trudgill of the British Insurance Brokers’ Association.
“There is a long-term potential for increases for the man on the street, but this will depend on the total cost of the disaster and whether the reserves of global reinsurers are significantly affected,” he says.
Insurance companies say it is still too early to determine the insurance cost of Japan’s earthquake.
Early estimates have been between £9bn and £37bn – although the economic cost will be far greater.
Reinsurers, which provide financial backing to insurance companies in the event of a large-scale global disaster, have benefited from several years without a major catastrophe so analysts believe the market should be capable of absorbing losses.
But Japan’s earthquake comes close on the heels of the earthquakes in New Zealand and widespread flooding in Australia.
Combined, these events could exhaust reserves and make a difference to future pricing.
“Rates are relatively low and the market is expected to turn,” says Barrie Cornes, insurance analyst at Panmure Gordon.
“The series of natural catastrophes in the past three or four months could be enough to push up global insurance prices.”
If global reinsurance rates do rise, there will be a time lag on any changes to general insurance premiums.
Personal insurance markets within countries factor reinsurance rates into what they charge customers, but this make up just a small percentage of the whole cost.
Far more depends on previous claims and localised risks within a particular market.
Even if global reinsurnace rates doubled, the knock-on repricing of general insurance premiums would mean an increase of only a few per cent, according to one insurer.
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