In the face of a record catastrophe season, state residualmarkets need to take a dose of reality and think about increasingpremiums to reflect risk or face serious trouble in the future, anindustry economist said.

Robert P. Hartwig, vice president and chief economist for theInsurance Information Institute in New York, said the reality ofthe catastrophic losses the insurance industry has experienced thisyear from hurricanes will mean higher rates for homeowners andcommercial clients for years to come. He said strains from thelosses will mean primary insurers have to increase premiums andre-examine their risk appetites in the wind-exposed regions.

Some insurers, Mr. Hartwig observed, will seek to reduce theirexposure. The reluctance of new capital entering that marketplacewill mean fewer primary insurers and more policyholders turning tothe state residual markets for insurance.

Mr. Hartwig estimates that total hurricane losses currentlystand at $55.7 billion, (a figure he called conservative)–almostdouble last year's record losses of $27.5 billion.

Hurricane Wilma, with estimated losses topping $10 billion, willclearly make the top 10 list, he noted.

"While insurers are not expecting to see doubling of lossincreases for the next few years, they do see elevated losses fordecades to come," he said. "Homeowners, commercial and reinsurancewill have to be priced to reflect that elevated risk."

The current state residual system must reassess its pricingpolicies in the face of this new reality, he pointed out. Themarkets must no longer bow to political pressure to keep rates lowand must raise rates to be actuarially sound. The pricing, henoted, needs to not only cover current losses but build reservesfor the future.

"The states will have to raise rates more than the privateinsurers," Mr. Hartwig said.

Yesterday, Fitch Ratings downgraded Florida's residual market,Citizens Property Insurance Corporation, long-term issuer andsenior debt ratings. The rating service lowered Citizens rating to"A-minus" from "A," with a negative outlook. However, the"triple-A" rating on its high-risk account senior secured pre-eventnote issues remained intact with a stable outlook.

Fitch said while the fund has ample claims-paying resources, itis concerned that the quality of the Florida insurance market, fromwhich Citizens levies assessments to cover deficiencies, coulddeteriorate. It noted the loss of financially strong insurersleaving the market to small carriers and Citizens, which do notreflect the same financial strength.

A.M. Best announced yesterday that it has downgraded thefinancial strength ratings of Southern Farm Bureau PropertyInsurance Company, based in Ridgeland, Miss., and Hamilton,Bermuda-based Montpelier Reinsurance Ltd. Both companies' financialstrength ratings went from "A to "A-minus."

The Oldwick, N.J.-based rating service cited losses incurredfrom Hurricanes Katrina and Rita for the actions.

Meanwhile, the Property Casualty Insurers Association ofAmerica, based in Des Plaines, Ill., said insurers are confidentthey have enough adjusters in Florida to deal with claims arisingfrom Hurricane Wilma.

"The four storms that hit Florida within six weeks last yearprovided the industry with experience in responding to consecutivemajor hurricanes, and insurers are well prepared for thissituation," PCI said.