Stephen Catlin, the chief executive of international specialty property/casualty insurer and reinsurer Catlin Group Limited, Forecast a decline in premiums for non-catastrophe exposed classes of insurance and reinsurance, if the current hurricane season remains benign.
However, in his lecture on Wednesday at Lloyd’s, sponsored by the Insurance Institute of London, he warned that it is far too early to categorize the 2006 hurricane season as mild. “There is currently an amount of euphoria about the current hurricane season,” he stated. “While this euphoria grows more appropriate as the days pass, we must remember that the hurricane season does not end until 30 November.”
He based his observations on The Catlin Group’s broad experience in the P/C market. It has four operating companies – in the U.S., Bermuda and the U.K., and concluded that “even if there are few significant US hurricane losses during 2006, rates for catastrophe exposed classes of business, such as property catastrophe reinsurance, are not likely to decrease because the demand for this type of coverage still exceeds the supply.” He noted the big increases in these classes of insurance and reinsurance since the record series of hurricanes in 2005.
In addition to the more or less mild season so far, Catlin described two other possibilities: A season such as 2004, where they’re “were several large hurricanes but no single ‘mega-catastrophe’ like Hurricane Katrina.” In that case premiums for catastrophe exposed classes of business would likely increase further, but “rates for non-catastrophe exposed business, such as casualty classes, would likely remain flat or increase slightly under this scenario.”
However, if the current hurricane season turns into 2005 with insured damage exceeding US$60 billion – “there could be a severe shortage of capacity for catastrophe exposed classes of business,” he noted. “In addition, any further catastrophe losses sustained by insurers and reinsurers during 2006 would likely mean substantially increased rates for non-catastrophe exposed classes.
“At the end of the day, it is market forces which will decide the direction of rates,” he continued. “And, no matter the outcome of the hurricane season, disciplined underwriting is needed for a strong marketplace.”
The industry, however, should take a broader approach to the challenge that hurricanes pose. It has certainly increased in recent years, not only, Catlin noted, “because of the increasing number of severe storms, but also because of rapidly escalating property values in catastrophe exposed regions, like Florida and the US Gulf Coast.
“The catastrophe models – both the commercially available models and the models developed in-house – did not adequately capture the rise in economic values in Florida and along the Gulf Coast,” he continued. “We got the economic values wrong, so we also got the insured values wrong and therefore we got the ‘PMLs’ wrong,” he stated, referring to the probable maximum loss that an individual company would sustain from a catastrophic storm.
As more than one analyst has concluded, individuals who wish to live in catastrophe exposed regions must assume financial responsibility for their decision, including bearing the high cost of insurance. “Is it reasonable to expect state or federal governments to subsidize the cost of insuring properties in high risk areas?” Catlin asked. Even more pointedly, he also asked “Is it reasonable to expect the insurance/reinsurance industry to do so?”
The problem, Catlin indicated, comes down to capacity. If the insurance industry does not have the capacity to provide sufficient coverage for the rising economic values in these areas, then the capital markets could help provide risk transfer. He acknowledged that this in fact is already happening as the capital markets have become increasingly involved in the transfer of catastrophic risk through catastrophe bonds and so-called reinsurance “sidecars.”
Catlin has already announced plans to tap into the capital markets. Catlin Insurance Company Ltd. of Bermuda intends to participate in a cat bond transaction (See IJ Website Oct. 2). Subject to completion of contractual arrangements, it would enter a catastrophe swap agreement that would provide it with coverage of up to US$200.25 million in the event of a series of severe natural catastrophes.”
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