FRANKFURT, Dec 17 (Reuters) - International insurance watchdogs are working on a system to help safeguard reinsurers' stability when they are hit by major catastrophes such as hurricanes, regulators said on Wednesday.
Big storms such as Hurricane Ike earlier this year, which insurers estimate could cost the industry up to $20 billion in damage claims, can affect reinsurers around the world.
"Resilient major reinsurance companies are crucial in order to absorb any major external shock," said the International Association of Insurance Supervisors (IAIS) in its annual report on the reinsurance industry.
Reinsurers such as Munich Re or Swiss Re provide a backstop to insurance companies, helping them to shoulder damage claims from storms or earthquakes.
Insurance industry observers have worried that big damage claims, particularly if they occurred when financial markets were already under stress, could threaten reinsurers' stability.
The IAIS said an early warning system, which was proposed by the head of insurance supervision at German watchdog BaFin last year, could help build trust among market participants in different countries following a big loss, thus bolstering financial stability.
"In the aftermath of a catastrophe, (the) data would be immediately available to assess the shock absorption capacity of the industry by providing an aggregated estimate of the total exposure," the IAIS said.
The IAIS, which represents insurance regulators in 140 countries that cover 97 percent of the world's insurance premiums, said reinsurers have been relatively resilient in the wake of financial market turbulence.
That had contributed to both the stability of the global insurance markets as well as the security of individual insurance customers, Peter Braumueller, chairman of the IAIS executive committee, said in a statement.
"Effects of recent market conditions on the global reinsurance industry have caused significant but not widespread asset-side issues and a greater degree of unresolved liability-side issues," the report said.
However, perception of default risks among large reinsurers have increased, as shown by a seven-fold increase in their credit spreads and the 40 percent loss in their equity value since April 2007, the report said.
In addition, the probability of observing more than one default rose to about seven percent, a more than 10-fold increase, since the beginning of the crisis in July 2007, it said.
REUTERS 3000 XTRA CUSTOMERS CAN FIND THE IAIS REPORT AT: http://www.iaisweb.org/__temp/Global_Reinsurance_Market_Report_2008.pdf