Posts Tagged ‘reinsurance’

Will a Financial Tsunami Hit the World’s Insurance Markets?

March 17, 2011

 

By now no one on the planet is a stranger to the disaster in Japan that continues to unfold as I write this.  A devastating 9.0 earthquake that triggered a massive tsunami has inflicted on northern Japan a disaster of biblical proportion.  Even now unfolding are potential disasters at 4 nuclear reactors impacted by the earthquake.  Fuel rods have been left exposed, the containment chambers cracked open, and radioactive gasses are leaking into the atmosphere.  The magnitude of the disaster continues to grow by the hour.  Deaths are conservatively being estimated at 15,000 people although there are whole towns that are unaccounted for and this number will likely climb.

As bad as this is for the Japanese people, it will soon have a ripple effect across the planet.  Japan is the third largest world-wide economy and its government, businesses and people are one of the largest investors in the United States.  Those investments are being called back to begin funding the rebuilding of Japan’s infrastructure.  With that lending capacity out of the market the cost of borrowing will start to rise.  Boston-based AIR Worldwide, an insurance catastrophe modeling firm, has estimated the insurance costs associated with just the earthquake to be upwards of $35 Billion.  The overall costs will go up when the effects of the tsunami and the potential for radioactive leakage from the troubled nuclear plants are factored in.   Herein lies the second impact on the global economy.

Insurance analyst had estimated that it would take a $50B event or combination of events this year to turn the insurance market away from its decade-long pricing slide and trigger a hard market response.    The last 4 months have seen a $10B earthquake in New Zealand and another $10B in losses associated with continued unrest in the Middle East.  The Japanese earthquake and tsunami will easily tip the scales above $50B in just the first quarter of 2011.  If indeed the analyst are right we may see an unprecedented increase in insurance prices due to capacity problems with the global reinsurance market.

Captive insurance programs have often served as a refuge when overall insurance market prices increase.  The critical aspect to involvement in a captive insurance program now is the timing.   In order to derive maximum value to a captive program you must initiate it ahead of the crisis.  Businesses that have historically been at the forefront of risk financing instability like transportation, energy, manufacturing and medical professional liability need to take immediate action if they want to mitigate the impact of this global shift in insurance costs.  Captives, and other alternative risk structures, can provide insurance capacity where there is none in the market.  They can also mitigate your exposure to rising insurance costs.

If you are interested in discussing how an alternative risk program can benefit your organization we have a team of consultants and advisors ready to meet with you.  Contact us at 440-264-9992 so that we can direct you to one of our team members.

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