Swiss Re has estimated that the Christchurch earthquake in February will cost the insurance industry upwards of US$6 billion. The re-insurer has also estimated its own claims for the earthquake, net of the benefits of retrocession, to be around US$800 million before tax. Turning to the Queensland floods, Swiss Re has estimated claims, net of the benefits of retrocession and before tax, to be US$325 million. For claims relating to Cyclone Yasi, Swiss Re has estimated it will be liable for US$100 million. The Insurance Council of Australia says that at the beginning of February, 43,255 flood claims had been received, and $201 million had been paid to policy holders after assessing 77 per cent of the initial claims. But not everyone in the industry is so positive that there is a viable market in Australia for catastrophe bonds. Ryan Bisch, a senior associate with Mercer Investment Consulting, questions the need for a catastrophe bond market in Australia.

So far, reinsurers in Australia have not needed to issue ‘cat’ bonds to reduce their exposure to natural disasters. But this could change if more people buy insurance against the type of high-intensity, low-probability events, such as earthquakes. “If the need for insurance increases significantly, and the number of insurance companies buying reinsurances increases, then there is definitely a market for catastrophe bonds in Australia.” Bisch says losses incurred by reinsurers could cause this, as recent events in Australia and New Zealand could drive the price of reinsurance and therefore insurance to increase significantly. Limited capacity from some reinsurers to absorb more risk could add to demands for a catastrophe bond market in Australia. This is the general pattern in most of the global insurance and reinsurance markets, says Chi Hum, managing director of Guy Carpenter Securities, a reinsurance broker. “When something happens, the reality of the event sinks into the market; more people want to buy, pricing goes up, capacity can’t meet the demand,” Hum says. “That happened in the US, post-Katrina.”

However, Seo says the recent natural catastrophes alone will not cause any future the price increases. Rather, he says, the events will have accelerated the inevitable rise of insurance costs. To date, Australia and New Zealand have been accessing reinsurance at cost price – making it a bargain buy. “The general consensus is that the markets down in Australia and New Zealand was getting its reinsurance very cheap, close to cost and some would say even below cost,” Seo says. However, this lack of rent on insurance monies will be something of the past as, inevitably, more capital must be held against incremental increases in risk. “So all these things are kind of changing. The era of cheap reinsurance is probably over and recent, unfortunate events down in Australia and New Zealand only helped to precipitate that. “But it was ending anyway: it accelerated and punctuates the break with the old regime.” Seo says everybody will have to learn to deal with higher charges on capital, saying goodbye to bargains – and this will make companies look into the realm of catastrophe bonds.