Kramer: Northridge a proving ground for Bermuda
The Northridge earthquake of 1994 served to prove the value of the Bermuda market at a time when it was facing negative attitudes from the Lloyd’s market.
That is the view of Don Kramer, chairman and CEO of ILS Capital Management, who says that the London market had looked at the nascent Bermuda catastrophe market and regarded it as being one big loss away from disappearing.
With a number of the Island’s most prominent names—Tempest Re, RenaissanceRe and PartnerRe—having only established themselves in 1993, some felt its sense of superiority and the fragility of the Bermuda catastrophe market was justified.
However, as Kramer explains: “That didn’t happen. As it turned out Bermuda started taking over the entire catastrophe market”.
Lloyd’s ability to develop aggressively in the cat space was constrained by concerns relating to the exposure of the guarantee fund, says Kramer, which meant “Lloyd’s wasn’t anxious for its syndicates to write a lot of cat business”. Into this gap stepped Bermuda.
Northridge was a valuable lesson for the Bermuda market, but not one that knocked it off its course and the Island quickly cemented its position as the centre of the global catastrophe market, says Kramer.
Eight companies were formed that year, and following Northridge all eight continued to write business, says Kramer. A benign catastrophe season for the rest of the year helped matters, but the earthquake’s impact on the Bermuda market was more limited than Lloyd’s and others had expected.
Indicative of the distance travelled by Bermuda since then is the minimal impact a similar event would have today. “Frankly, the impact of an event similar to Northridge wouldn’t come close”, says Kramer.
He concedes that an event straight after your first renewal isn’t opportune, but the market was able to overcome a tough first January. The Kobe earthquake on 17th January the following year certainly raised eyebrows though, says Kramer. “Following that event I told my staff to write a 364 day policy leaving out the 19th,” jokes Kramer.
Turning to the take-up of California earthquake insurance today, Kramer admits that it has declined since Northridge, but is nevertheless reflective about the trend. “When dealing with probabilities of 1 in 100 we don’t know if we are in the first year or the ninety-ninth. These kinds of events are random and very low frequency.”
Kobe: the second test
Commenting on the implications of Northridge Herbert Haag, who was president and CEO of PartnerRe in 1993 says, "the Northridge Earthquake was not such a devastating insurance event--big as it was--and did not leave a severe dent in the market. The reinsurers paid up and it gave immediate credibility to the newly established Bermuda cat market, led by PartnerRe and others."
"The more decisive event came exactly one year later – on 17th January 1995 – with the disastrous Kobe Earthquake in Japan, when again Bermuda was tested and when the catastrophe modelling companies, such as RMS, received a reality check as their modelling data were insufficient and wrong. These two earthquakes heralded a new start of improved modelling and research data, particularly of RMS, but also cemented the reputation of the still young Bermuda reinsurance companies."
