With the odd combination of record catastrophe losses and atwice-in-a generation underwriting profit for primary carriers in2005, the Jan. 1 reinsurance renewal season loomed large on thehorizon with the potential for some surprises. But pretty much asexpected, carriers with big Gulf Coast exposures found themselvesfacing some hefty premium hikes for disaster exposures, while otherlines and regions were essentially flat or experienced only amoderate rise in pricing.

In contrast to 2001, when the World Trade Center terroristattacks sent a shock wave through an already weakened industry,insurers had a few good years under their belts in 2005 thatsoftened the triple blow of Hurricanes Katrina, Rita and Wilma,analysts noted.

In addition, new capital and alternative risk-transfermechanisms served to keep in check any desire on the part ofreinsurers to replenish their lost surplus in too rapid a fashionat the expense of either sacrificing marketshare or having theirclients retain more risk, analysts observed.

Record 2005 catastrophe losses also had their effect on ratingagencies and catastrophe modelers, who play a strong role indetermining how much risk secondary insurers can carry and thusultimate market capacity, industry observers contend.

Nonetheless, despite any seminal market shifts brought on by thestorms, certain risk calculations are undergoing important changes,according to Grahame Millwater, chairman of London-based WillisRe.

“Sources of risk are increasing, the frequency and severity ofcatastrophes seem to be rising, and the values at risk increase notonly with urbanization and infrastructure, but with increasedpenetration of the insurance product,” he said.

A report published earlier this month by the New York-based GuyCarpenter reinsurance brokerage said that while in some instancesreinsurers pressed for and received substantial rate increases inthe aftermath of the storms, their impact was more indirect.

“All key players in the marketplace–insurers, reinsurers,modeling and rating agencies–recognized that the existing viewpointgrossly underestimated both the frequency and severity of the NorthAtlantic hurricanes,” the report stated.

“However, the Jan. 1, 2006 renewals were just the first act in adrama that will play out over the next year, as models get revised,rating agencies implement new rating methodologies forcatastrophes, and primary insurers engage regulators in contentiousstruggles for rate adequacy,” the report added.

Steven Bolland, president of the New York-based reinsurancebroker Gill and Roeser, said the main impact of the catastrophelosses fell on U.S. insurers.

“Outside the U.S., we really were not seeing increases unlessthe company specifically had some losses themselves–say, forexample, the storm losses in Northern Europe,” he noted.

Opinions differed on just how sharp the rate increases were forthose companies without Gulf losses on the book, with many sayingthey were pretty much spared the worst.

But Larry Spoolstra, the Barrington, Ill.-based chiefunderwriter for North America property and casualty reinsurance atGE Solutions, said in regard to those carriers “it's possible froma modeled perspective it did not look like a rate increase forthem,” due to upward model revisions in expected losses brought onby the storms.

“Don't be fooled into believing those companies did not getprice increases,” he added.

As for the so-called “Class of 2005″–those primarilyBermuda-based startups looking to capitalize on the price increasesanticipated after record storm losses–the pot at the end of therainbow proved a little bit disappointing.

“When you looked at all their Private Placement Memorandum andstartup documents, they were looking to get rate increases onaverage of between 30 percent and 40 percent,” according to Mr.Bolland. “I think they got closer on average to 20 percent, becauseif certain parts of the world are flat in their catastrophepricing, then it is very difficult to get 40 percent.”

David Small, senior property-casualty analyst for Bear Stearns,said that with many of the startups not yet fully operational, thefull impact of their new capital will not be felt until the midyearrenewal season.

“So what you have this January is really peak pricing,” said Mr.Small, keeping with his general thesis that any catastrophe-relatedprice firming expectations might not come to fruition.

On the one hand, analysts such as V.J. Dowling, managing partnerfor Dowling & Partners and Securities LLC, said the ultimate$10 billion factor of the startups will not prove to be all thatsignificant one way or the other this year.

Indeed, the general consensus was that capacity proved to beadequate for this year's renewals.

“Not only was there the Class of '05, but a lot of the otherreinsurers, particularly in Bermuda, raised additional capital,”according to Mr. Bolland. “We like to say they reloaded.”

The Guy Carpenter report agreed. “Capacity was adequate butexpensive for most renewing programs. The biggest price change wasin the upper layers,” the brokerage said.

However, for the largest programs there was a reduction in themaximum available limit from prior years. “The impact of the ratingagencies' higher capital charges has reduced the maximumper-program commitments that the reinsurers are willing to make,”according to Guy Carpenter's report.

Reinsurers thus have decided to scale down their per-programcommitments rather than write fewer deals, the report added.

Particularly in the case of Katrina, the years it takes tosettle claims will also delay the impact of the storms, despite allthe modeling and estimates of potential losses and subsequentreserving.

“It is said of both insurers and reinsurers that they reallydon't feel the pain until they lose the case,” Mr. Bollandobserved.

Chuck Hewitt, executive vice president for London-basedBenfield, said that pricing was pushed up dramatically oncomparable layers.

At the same time, primary companies retained more risk, “andthat was a combination of reinsurers deciding they did not want tosell it at that level anymore and clients deciding the rateincreases at that level did not make sense,” he added.

Thus total reinsurance premium has not gone up by as much as thereinsurance rate increases, according to Benfield's Mr. Hewitt, asretentions move up and clients buy more coverage at upperlevels.

“But they have indeed gone up quite a bit, particularly onloss-affected programs,” he said. “For example, a $50 millionretention might go to $75 million or $100 million, but the companywould then buy $100 million to $200 million on top.”

Both the tightening by rating agencies of capital requirementsand the cost of replenishing capital served to limit capacitysomewhat, according to Mr. Hewitt, “and so a dollar of incrementalcapital did not generate a dollar of incremental capacity.”

In addition, those reinsurers with storm-related downgradesfaced new capital costs for the renewal season. “The ratingagencies' actions indicated this was serious, and all thereinsurers are treating it as serious,” he said.

Mark Rouck, Chicago-based analyst for Fitch Ratings, said it wastoo difficult at this point to determine what impact the ratingagencies' rules-tightening had on the market this January, althoughit existed.

As for the casualty market, Jim Bradshaw, executive vicepresident at Willis Re, said it remains to be seen just what impactthe catastrophe losses of 2005 will have in this arena.

“The admitted casualty market appeared to hold the line onprice, terms and conditions in 2005, especially on programscovering highly volatile lines of business,” he noted.

However, tougher exposures continued to be pushed out of theindustry, and were either held net or reinsured within thefacultative market, he added.

The large-account umbrella and excess market witnessed thegreatest movement, with price reductions for some reaching 25percent as companies aggressively competed to maintain the largeraccounts, according to Mr. Bradshaw.

As for large public company directors and officers insurance,the Jan. 1 season saw a reduced reinsurance commitment and atightening of treaty terms, said Chip Lalone another executive vicepresident at Willis Re.

“Reinsurers are not convinced that premium levels arecommensurate with exposure to inherent volatility and mushroomingseverity of settlements,” he said.