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An ill wind

Nicola York looks at how the damage wreaked by Hurricane Katrina could spill over into the UK life insurance and critical-illness cover sectors

The devastating effects of Hurricane Katrina could be felt in the UK protection market with life and critical-illness cover premium rates rising after the massive hit on reinsurers.

Scottish Widows marketing director protection Nick Kirwan says the huge insurance claims are draining reinsurers’ capital and leading to a reduction in capacity which will put pressure on rates. He says: “The laws of supply and demand kick in so if you have got limited capacity to write protection business then the price goes up.”

He adds that about a year after the terrorist attacks of September 11, 2001, premiums for guaranteed critical cover leapt by around 60 per cent.

Kirwan says: “I am not saying this is a reason to buy protection but if you were going to buy protection there is probably a reason to buy it now. It can be the spur to say that this does not look as if it is going to get any cheaper.”

Lifesearch senior technical adviser Kevin Carr says disasters such as Hurricane Katrina, the recent London bombings and the tsunami tend to make people think more about buying protection products. He says: “We certainly saw a significant increase after the tsunami in demand or enquiries which I think was around 30 or 40 per cent more than we had budgeted for so it does lead to an increase in demand as well as having an impact on the supply and the price.”

He thinks it is feasible that prices could rise and consumers would be better off to buy protection products now rather than wait until next year. He also thinks that critical insurance will become less comprehensive after the Association of British Insurers introduces changes next year.

But not everyone agrees that premiums will rise. The ABI thinks there is a difference between what happened after 9/11 and what is going to happen in the wake of the hurricane and so it is unlikely there will be the same rise in rates. An ABI spokesman says: “Much of the cost of Hurricane Katrina is likely to be borne by the reinsurance sector. This may reduce temporarily the availability of reinsurance capital around the world so it is possible, although unlikely, that there could be some impact on UK critical-illness insurance.”

RGA head of communications Jason Hurley says it is “not infeasible” that life and CI premiums could go up as they did after 9/11 but he says the difference between then and now is that the life reinsurance market is probably more competitive than it was then. He says: “I do not see there is going to be any direct impact on our rates. Clearly, if the likes of Swiss Re and Munich Re do increase their premiums then we are going to increase premiums as well, so I think it is possible.

“But it is working at the moment in a market where rates are falling and pretty much every week one insurance company or another are cutting their protection premiums so it may well halt or reverse that slide but I do not know how big it is going to be.”

RGA did reprice after 9/11 but Hurley says it is difficult to say how much rates went up by as it happened in several stages over a long period of time. During the tail end of 2002 and the beginning of 2003, those rate increases were passed on to the customer, he says.

Swiss Re UK head of communications Tim Dickenson says the company does not anticipate any changes to its life reinsurance rates as a result of Katrina but did not comment on critical-illness cover rates.

He says: “The fact that events of the magnitude of Katrina can and do occur underlines the fact that insurers must charge an economically viable price for the insurance cover they provide.

“This is true of life insurance as much as property insurance. Swiss Re’s philosophy has always been to underwrite profitably and will remain firm on achieving appropriate prices across all of its business.”

Katrina could have a further impact upon the protection industry.

Kirwan points out that after 9/11, maximum levels on critical cover came down from 1m-plus to 500,000 and this is a development which he thinks could repeat itself. He says: “When you get a restricted supply because of a restriction of capital in the market, then the another way of regulating it is to restrict the maximum sum assured that any one customer can take out so you could see a restriction of that nature coming into the market.”

But Hurley is confident that reinsurers will not be raising premiums as they did after 9/11 and attributes this to three main differences between then and now. He says: “The main thing at the moment is that the market is more competitive in terms of the number of reinsurers and the actual size of the market has fallen as well. Another thing that has not happened this time is that there have not been big falls in stockmarket values, which obviously did happen four years ago.

“The other thing in terms of CI prices is that last time we were starting from a very low base whereas this time, premiums have already gone up quite significantly in 2003 and have been fairly stable since then. They have maybe fallen a smidgen but they are still nowhere near the level that they were at in 2001.”

Kirwan says: “I do not think you have an event this big without there being some shockwaves running around the different markets.

“I am not expecting this to have any effect for a year or 18 months because people will need to assess the situation but I am sure it will put upward pressure on rates – what we do not know yet is when and how much by but I think everybody is going to be monitoring the situation and planning accordingly.”



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