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By CYRIL TUOHY, managing editor of Risk & Insurance®

Buried deep inside a recent state-of-the-market report by Willis Group Holdings is one word that encapsulates where the property-catastrophe insurance marketplace sits.

With relatively mild catastrophe losses in 2009 and rates continuing to drift downward through the first two quarters of 2010, the demand for property-CAT coverage is in decline.

Property-CAT rates on renewals in the first quarter were down 5 percent to 10 percent. Renewals in the second quarter were predicted to be down 10 percent to 15 percent, according to the Willis report, titled "Marketplace Realities & Risk Management Solutions," published at the end of April 2010.

For the moment there's plenty of buffer to absorb the next catastrophe, and even the one after that.

Carriers' first-quarter earnings were solid, and capacity remains plentiful, courtesy of three new Lloyd's syndicates created in the second half of 2009 and strong performance from the investment markets.

Even in the case of the Chile earthquake, which stuck the industry with insured losses of between $8 billion and $10 billion, primary carriers are going to get largely reimbursed for their losses by their reinsurers.

"These initial loss events are not expected to move the market, but they serve as a reminder of how frail the current market conditions really may be," Thomas Hess, chief economist for Swiss Re, commented in the Willis report.

The record $16 billion in first-quarter 2010 catastrophe losses--more than the $14.6 billion in CAT losses recorded in all of last year, according to A.M. Best Co. Inc.--is significant but still nowhere near large enough to turn the market. A market turn would require losses in the tens of billions of dollars.

PROBABILITIES AND UNTESTED POOLS

Given the extent of losses that must occur, then, why are experts referring to the market as "frail"?

For one, three hurricane forecasters predict four intense hurricanes in the Atlantic basin for the coming hurricane season, according to a report released May 17 by A.M. Best Co.

The meteorologists out of Colorado State University think there is a 69 percent probability that at least one major hurricane will make landfall somewhere along the U.S. coastline during the 2010 hurricane season.

"That compares with an average probability of 52 percent for the last century," noted the A.M. Best report, titled "U.S. Hurricane Catastrophe Review."

Let's not forget the state-run windstorm pools and residual carriers insuring people in exposed coastal areas. With the pullback of private insurers in Florida, Massachusetts, North Carolina, Louisiana and Texas, the liabilities in those pools have skyrocketed, according to A.M. Best.

Relatively mild hurricane seasons since 2005 have meant that the claims-paying abilities of the pools are still untested. If and when property owners file claims against insurance pools, which may be with or without enough reinsurance to pay claims, assessments could be levied against insurers to make up the difference.

In turn, insurers are likely to pass on the increases to commercial and residential insurance buyers through higher premiums charges, A.M. Best noted.

A.M. Best last December affirmed its stable outlook for U.S. personal lines, commercial lines and reinsurance sectors.

May 24, 2010

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