Earthquake hits 'already challenging' local reinsurance industry: AM Best

Rating agency AM Best says the devastating series of earthquakes that hit Turkey on Monday is “another blow” to the country’s strained reinsurance system.

Catastrophic tremors struck across southern Turkey and northern Syria, with 7.8 and 7.5 magnitude quakes recorded within 12 hours of each other. Economic losses from the event are projected to exceed $US10 billion ($14.5 billion).

Although the insurance cost is expected to be “relatively low”, AM Best says the quakes will have “significantly weakened” the local reinsurance market against the backdrop of a worsening economy and inflation.

“The deterioration of economic conditions in Türkiye meaningfully increased the asset and underwriting risks of many (re)insurers in 2022,” AM Best said.

International reinsurers, including Swiss Re and Munich Re, are expected to cover some losses along with the government-owned Turkish Catastrophe Insurance Pool (TCIP). Although it is a government initiative, the pool is managed by an elected company. Currently, the operations are being run by Turk Reasurans A.S, a reinsurer set up by the government in 2019.

The TCIP provides compulsory earthquake cover for residential property owners, up to a prescribed amount, with homeowners able to get further protection with direct policies with local insurers. Business and commercial properties are not compelled to hold earthquake insurance, although market practices consistently include it in issued policies.

AM Best notes that despite legislation requiring all private dwellings in Turkish municipalities to have earthquake insurance, there is no legal penalty for not being covered.

Figures from the TCIP expect insurance penetration at around 52% in the region affected by the tremors, which AM Best says will result in varied levels of economic and insurance loss.

“Penetration is being driven up through a combination of social marketing and the refusal of utility providers and mortgage lenders to provide services without cover,” AM Best said.

The TCIP’s latest annual report retained a reinsurance lower limit of TRY 5 billion ($0.38 billion) while the maximum limit stood at TRY 36.9 billion ($2.81 billion), up from the previous year. Reinsurers have yet to outline projections on the expected insurance loss related to the event.

“While the pool is owned by the state, the government has no official right to make capital extractions such as cash calls,” AM Best said

“The pool retains risk, but also uses traditional international reinsurance and has previously dipped into alternative capital markets through the issue of catastrophe bonds.”

The agency says despite assistance from international partners, local reinsurers will continue to face “an extremely challenging operating environment, characterised by significant inflation and a weakening currency.”