Impact of Turkey quakes adds to challenging environment for re/insurers: AM Best

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A new report from AM Best has highlighted how the impact of the two earthquakes in south-eastern Turkey, adds to what is already a “challenging operating environment” for re/insurers within the country.

On February 6, 2023, two powerful earthquakes of more than 7.5 magnitude struck near the south-eastern Turkish cities of Gaziantep and Kahramanmaras, the country’s sixth and 18th largest cities.

The earthquakes have caused for thousands of buildings to be destroyed, and over 1,000 deaths have been recorded. According to the US Geological Survey (USGS), both earthquakes could result in more than US $1 billion of losses.

Best notes that while initial information indicates that insurance penetration in the region is relatively low compared to the most populous centres in Western Türkiye, the tremors occurred against a backdrop of a prolonged period of extreme economic turbulence, which the rating agency believes “significantly weakened” the creditworthiness of the local re/insurance market.

Since 2000, earthquake insurance has been compulsory for private dwellings within municipal boundaries in Tukey, and is covered by the national Turkish Catastrophe Insurance Pool.

The TCIP was established in 1999 following an earthquake in Marmara. The TCIP provides building-only earthquake cover for residential property.

Membership of the pool is compulsory for residential property owners, and covers sums assured up to a prescribed level. The policies are distributed by direct insurance companies acting as intermediaries. However, while the policies are compulsory for residential homes, there is no legal penalty for not being covered.

Consequently, Best notes that penetration rates vary significantly across the country, and they are lower in the south-eastern regions of the country, where the two recent earthquakes occurred.

According to TCIP’s latest published annual report, it shows that reinsurance cover incepting in 2021 had a lower limit of TRY 5.0 billion ($0.4 billion as at 31 December, 2021) (unchanged from the previous year), while the upper limit stood at TRY 36.9 billion ($3.2 billion) (up from TRY 32.2 billion the previous year).

Reinsurance giants 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.

Best suggested that the latest figures from TCIP shows compulsory earthquake insurance penetration at around 52% in the region most affected by the latest incidents. As a result, the rating agency expects that – as with previous natural disasters in the country – there will be a significant variance between the economic and insured losses from the two earthquakes.

While it is likely that international reinsurance markets will pick up a proportion of the losses, Best states that these events occur at a time where re/insurers in Turkey are facing an extremely challenging operating environment. This is showcased by significant inflation and a weakening currency.

Following contrarian economic policy by the Central Bank of Turkey, annual inflation increased drastically throughout 2022 in the country, peaking at 86% in October.

Additionally, the Turkish lira lost almost 30% of its value against the US dollar in 2022 too.

Best concludes by estimating that this deterioration of the economic conditions in the country meaningfully increased the asset and underwriting risks of many re/insurers operating within Turkey, weighing on their risk-adjusted capitalisation.

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