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The seeming failures of catastrophe risk models to estimate the losses from Katrina still have the industry wondering about these risk management tools. This issue, and scientific evidence pointing to more hurricane risk in the near- to midterm, have driven, and will continue to drive, significant changes in the P/C industry, experts said during sessions at this year's CPCU Society conference. A major factor in this equation is reinsurance, which, according to Patrick Mailloux, president and CEO of Swiss Re America Corp., is currently experiencing a very unstable market on the property side because of skewed supply and demand.

Demand is high because of "heightened perception" of property catastrophe risk. The supply side has curtailed its exposure for this same reason. The situation is compounded by the collapse of the retrocessional market in 2006, he said.

Buyers and sellers are "crossing their fingers" that another big catastrophe doesn't happen in 2006, said Mailloux, because who knows what would happen then to the market in 2007.

John P. Lebens, vice president of corporate risk management and reinsurance for Nationwide Insurance Co., said, as the market stands now, P/C insurers renewing their reinsurance in January 2007 can expect rate hikes similar to what carriers saw in July 2006. In 2006, he explained, reinsurance prices jumped between the January and July renewals. Mike G. Wacek, president of Odyssey America Reinsurance Corp., agreed, saying that carriers can expect reinsurers to play "catch up" with rates in January to match last July's.

Wacek suggested that the skew of supply and demand behind these higher rates results from the large increase in expected values of insurers' exposure compared with previous estimates, thanks to the 2006 model versions, and the ratings agencies new capital requirements. He added that the biggest companies, however, didn't pay more this the past July.

But for some midsize regionals and smaller insurers, reinsurance has become a "rainy day" purchase--at least such is the case with W. Paul Taliaferro, chief financial officer and treasurer for Farmers Alliance Cos. "If you underwrite your book properly," Taliaferro said, "you might not need as much reinsurance as in the past."

Writing books properly could entail the end of cross-subsidization, or writing losing catastrophe business because an insurer is writing winning business elsewhere. Taliaferro's company also watches, and then emulates, what the Allstates and State Farms are doing. Allstate, for instance, is "pulling their guns back" from the coast, he said, just as State Farm did in Missouri because of earthquake exposure from the New Madrid fault.

Instead of putting its money in high-risk catastrophe areas, Taliaferro said, insurers could put their money in investments.

"We can deploy our money, and get paid for it," he said.

October 15, 2006

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