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The brutal 2005 hurricane season, which by some estimates caused more than $60 billion in property damage, is expected to raise property rates in the excess and surplus lines market by at least 20 percent in 2006, analysts and insurance industry executives say.

That's good news for carriers, who are expected to rake in billions more in premium. Indeed, an entire class of Bermuda-based opportunists have sprung out of nowhere to take advantage of the projected premium increases. But it's bad news for buyers of catastrophe property insurance, who are staring at much higher insurance bills.

Buyers nervous about price increases aren't likely to get much sympathy from primary carriers either. "We think that price increases across the board are justified. Period. Paragraph," says Paul Springman, executive vice president of specialty insurer Markel Corp.

Says Janet Jordan-Foster, executive vice president of specialties, Zurich in North America: "Time will tell, but I think it's an opportunity for property rates to climb after a number of years of declining rates, and given the huge losses in '05, clearly it needs to start increasing in 2006 and beyond."

Asked by how much premiums would go up--30 percent, 40 percent or even 50 percent--John DiBiasi, president of XL Insurance's new excess and surplus unit, said: "I think in some property scenarios, wind exposed, I think that's very possible. I don't know about 50 percent, but I think 20 percent, 30 percent, is pretty well within reason."

"The overall insurance marketplace has been hit with--heck, I don't know the number, I don't know if anyone knows this number yet--certainly in excess of $50 billion in losses with the storms that have already been tallied; that's real money," he says.

Buyers of excess and surplus catastrophe property may get some respite thanks to the influx of new companies starting up in Bermuda, but hardly much to celebrate.

About a dozen companies that so far have announced they would set up shop on the island are expected to inject $8 billion to $12 billion of fresh capital into the marketplace.

While these companies will add capacity, perhaps softening potential price hikes, Bermuda's so-called "Class of 2005" could also significantly restrict the terms as well, says David Blades, a senior financial analyst with A.M. Best Co. Inc. Rates will vary depending on the size of the account, Blades also says.

Richard Bouhan, executive director of the National Association of Professional Surplus Lines Offices Ltd., says he expects a "strong" excess and surplus marketplace in 2006

"While I think there's some softening that exists in some lines here and lines there, I think basically we're going to see a firmness in the market," he says. "Whether this reflects major percentage increases like we saw in the early parts of this decade, I'm not so sure that's going to happen. But it's certainly going to be firm, strong."

The 2005 season strengthened the property market, he adds.

Kevin Kelley, CEO of Lexington Insurance Co., the nation's leading writer of excess and surplus insurance contracts in terms of market share, says he is seeing prices in property lines increasing by 15 percent and 35 percent, "and in some cases well beyond that."

"Our production is strong, as well with price increases sticking principally on our property book, but also we're seeing a change in the casualty market as well," he says.

"I think what you have at work here is very much a reinsurance-led market in 2006," he continues. "As we all know, the reinsurance market took a heavy toll from Katrina, and from Rita and Wilma as well, and so the losses that have hit in the third quarter and will hit in the fourth quarter are rather substantial. Reinsurers have to dig themselves out of a big hole."

Beyond the price movements of the coming 12 months, some executives say they've changed their expectations regarding weather patterns after two exceptional hurricane seasons.

Hurricane patterns between 1995 and 2000 and between 2001 and 2005 have shifted to the extent that underwriters have also begun to change their assumptions.

"I believe it would be naïve for underwriters to assume that because we had a very dreadful 2005 and a painful 2004, that all of a sudden, something is going to change for 2006," says Kelley.

"If you take a look at the early forecast for the hurricane season for 2006, they are predicting maybe not as dire an environment as we saw in 2005, but nevertheless one that is going to have significant activity."

Because of this change, he says, "underwriters have to brace themselves for that reality and underwrite accordingly."

The last few hurricane seasons have even caused some executives to talk about altering the entire rating for Florida. "We think the entire state of Florida ought to be rated as coastal," says Springman.

Even Orlando, located in the center of the state and therefore somewhat more sheltered than Florida's littoral cities, saw two hurricanes sweep through in 2004.

But buyers with wind exposures staring at a 20 percent increase in their excess and surplus property premium, shocking as this may sound, may well be the lucky ones, Springman says. Even that kind of increase is not going to be enough.

"If somebody is looking at 20 percent rate increases across a portfolio that has more than just a nominal exposure to wind, they are really kidding themselves that 20 percent is adequate, because we believe there's been a fundamental shift in weather patterns that is going to result in more storm activity," says Springman.

No doubt, there's a good living to be made writing excess and surplus property risks. "Certainly, with coastal exposures, and with what has happened since Katrina, I think excess and surplus players can still make a pretty good living writing those kinds of risks," says Kevin Lee, associate analyst for P/C insurance with Moody's Investors Service.

CYRIL TOUHY is managing editor of Risk & Insurance®.

January 1, 2006

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