Earthquakes Deliver Another Blow to Turkey’s Re/Insurance Industry: Reports

February 8, 2023 by

Two powerful earthquakes, which hit southeastern Turkey on Feb. 6, 2023, deliver another blow to the local re/insurance industry, according to commentaries from AM Best and GlobalData.

While it is likely that international reinsurance markets will pick up a proportion of the losses, these events occur at a time when re/insurers in Turkey already have been contending with an extremely challenging operating environment, which has significantly weakened their creditworthiness, said the rating agency AM Best, in its report titled “Devastating Earthquakes Add to an Already Challenging Operating Environment for (Re)insurers in Türkiye.”

“The preliminary estimate of economic loss due to the current catastrophic event is more than $1.0 billion, and it will take years for Turkish insurers to settle the insured losses. The economic loss is expected to be more than two times the losses from a similar earthquake in 2020,” said Shabbir Ansari, senior insurance analyst at GlobalData, the London-based platform that provides data analytics and expert analysis about global industries. (Economic losses include insured losses, and the difference between the two is the insurance protection gap or the amount of insurance penetration).

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The local government-owned catastrophe pool – the Turkish Catastrophe Insurance Pool (TCIP, or DASK in Turkish) – retains risk but has no right to make cash calls, AM Best said, explaining that the pool uses traditional international reinsurance and has previously dipped into alternative capital market through the issue of catastrophe bonds.

“Munich Re and Swiss Re had the highest risk shares in the excess of loss programme, with the remaining capacity understood to be provided by international reinsurers in Europe, the London market and Bermuda,” AM Best continued.

Since 2000, earthquake insurance has been compulsory for private dwellings within municipal boundaries in Turkey and is covered by the TCIP. The pool covers sums assured up to a prescribed level but insurance above this level is optional and is not covered by the pool.

However, AM Best noted there is no legal penalty for not being covered, and, as a result, insurance penetration rates vary widely across Turkey and are lower in the southeastern regions of the country where the earthquakes occurred.

“The latest figures from TCIP suggest compulsory earthquake insurance penetration at around 52% in the region most affected by the [earthquakes].”

“According to GlobalData’s Global Insurance Database, property insurance gross written premiums (GWP) stood at TRY 26.1 billion ($2.9 billion) in 2021 and accounted for 29.8% of the Turkish general insurance market. The Turkish property insurance market registered an underwriting loss in 2021 as the combined ratio crossed 100% for the first time in the last 10 years and stood at 107.2%,” said Ansari at GlobalData.

“The combined ratio, which is a combination of loss and expense ratio, is expected to deteriorate further over the next few years due to the current catastrophic event,” he added.

Commercial Property Exposure

The TCIP does not cover commercial property, and earthquake insurance is not compulsory for businesses, AM Best explained. “However, it is market practice for earthquake cover to be included in policies issued by re/insurers.”

Commercial insurance penetration has been driven through a combination of social marketing and the refusal of utility providers and mortgage lenders to provide services without cover, the report said.

Challenging Business Environment

AM Best noted that the earthquakes occur at a time when re/insurers in Turkey are facing an extremely challenging business environment, characterized “by significant inflation and a weakening currency.”

Indeed, annual inflation rose drastically in 2022 in Turkey, peaking at 86% in October, while the Turkish lira lost almost 30% of its value against the U.S. dollar during the year, according to the report.

The deterioration of Turkey’s economy “meaningfully increased the asset and underwriting risks of many re/insurers,” which weighed on their risk-adjusted capitalization, AM Best estimated. “In addition, investment returns, on which many market participants had relied in the past, have become insufficient to compensate for poor underwriting experience, limiting internal capital generation.”

“As companies are yet to recover from the impact of the 2020 earthquake, the recent earthquake will further impact the profitability of property insurers. As a result, Turkish property insurers are expected to register underwriting losses in 2023 and 2024,” said Ansari at GlobalData.

AM Best said the 7.0 magnitude earthquake that struck Turkey’s third largest city Izmir, on Oct. 30, 2020, led TCIP to pay claims amounting to TRY435 million (US$52 million as at Oct. 30, 2020), versus an economic loss estimated by Aon at around US$400 million.

“Increased frequency of such large-scale natural calamities will further create the demand for natural catastrophic insurance in the country and support its growth. However, the profitability of insurers is expected to remain challenged over the next few years due to increasing claims and rising inflation,” Ansari continued.

Source: AM Best and GlobalData

Photograph: Fire burns containers at the port in the earthquake-stricken town of Iskenderun, southern Turkey, on Tuesday, Feb. 7, 2023, after a powerful earthquake hit southeast Turkey and Syria early Monday. (AP Photo/Hussein Malla)

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