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MONTE CARLO--Hurricane Katrina, which may cost the insurance industry as much as $60 billion, is expected to sharpen the terms and increase prices of insurance and reinsurance contracts in 2006, analysts and industry executives said.

"I think it's likely to have an impact on terms and pricing," said Laline Carvalho, a credit analyst with Standard & Poor's, speaking in early September at an annual conference of global reinsurers in Monte Carlo. "Now, whether it's going to be U.S. only or global, I think it really depends on the loss. At this point you're talking about a $40 billion to $60 billion estimate; I would suspect it's going to be a global impact."

Indeed, AIG has announced it will rise rates a minimum of 25 percent in the Gulf region from Florida to Texas, a minimum of 15 percent from Georgia to Virginia, a minimum of 15 percent for California earthquake coverage, and 10 percent in the rest of the nation, according to one reinsurance executive.

"Financing this loss is more than the energy and property markets can provide," said Charley Cantley, deputy chairman of Aon Re U.K.

Bermuda reinsurers are also expected to increase their prices charged to carriers. "Programs with exposures to U.S. hurricanes will go up 25 percent to 35 percent," said Konrad Rentrup, president and CEO of Hannover Re (Bermuda) Ltd.

"The market will definitely react in this way."

Contingent business interruption clauses in the contracts may also cause thorny headaches for the insurance industry, the analysts said, as carriers work out exactly how much businesses will suffer in the weeks and months after the hurricane stormed ashore in late August.

"I clearly think this is a market-moving event," said Jamie Veghte, CEO of XL Re America. "Both by geography and by class." Short-tail lines in particular will be hard hit, he said.

Steve Dreyer, an analyst with Standard & Poor's, agreed that Hurricane Katrina was a "seminal" event, on par with the losses sustained from the Sept. 11, 2001 attacks.

But he also noted that it was still too early to say exactly how terms and prices would change due to the hurricane. "So when you have these seminal events, I think the market is going to be in flux for a while," he said. "So yes, I think prices are going to go up and terms are going to

change but terms and prices on what? On a product that itself is going to change. So I think it's a little early to really speak with a lot of certainty about that."

Analysts also spoke of $50 billion in insured losses as the threshold. If insured losses come in under that, then much of Katrina's wrath will be relegated to an "earnings issue," a footnote in the quarterly earnings reports explaining to investors that the hurricane was the reason why the company failed to meet its profit targets.

Should the hurricane remain a thorn in the side of the industry's earnings, then they will be likely be affected for the next six to 12 months, said Carvalho.

If insured losses rise much beyond $50 billion, the analysts said, then Katrina's losses would become a more problematic "balance sheet" issue, forcing someinsurers and reinsurers to hunt for more capital to keep them solvent, in all likelihood by selling stock or issuing debt.

Moving north of the $50 billion mark would also likely force analysts to reconsider the financial health of the insurance sector as a whole. Standard & Poor's has maintained a stable outlook for the sector.

Hurricane Katrina, said Swiss Re CEO John Coomber, "is the most expensive event in history."

October 1, 2005

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