A 9/11 event that combines with severe hurricanes to create a 12month loss above $120 billion could tap out reinsurance sources forinsurers, a paper from GE Insurance Solutions predicts.

The report also noted that intense coastal development means thecost of hurricanes is rising and will eventually outstrip HurricaneKatrina, which caused $38 billion in insured losses.

The commentary is titled "Coastal Warning: The Rising Costs ofHurricane Frequency and Severity."

While increased frequency of hurricanes is nothing new inhistorical terms, the enormous growth in coastal population anddevelopment is dramatically increasing the potential for insuredlosses, GE Insurance Solutions said.

"Demographic trends in Florida and other coastal locations aswell as the likelihood of increased frequency and severity ofstorms should remind the [insurance] industry of the growingexposures it will continue to face. The cost of hurricanes willrise--sooner or later surpassing even those of Hurricane Katrina,"said the paper.

Kenneth Slack, senior underwriter, global property catastrophereinsurance, and Larry Spoolstra, chief underwriting officer forNorth America and Asia Pacific p-c reinsurance, at GE InsuranceSolutions, co-authored the paper.

The authors said there's a perception that Hurricane Katrinacreated an insured loss that was unforeseen. They noted, however,that it was well within the expected range of events anticipated bythe insurance industry.

However, they cautioned that Katrina may have demonstrated thatinsurers' loss forecast models underestimated the extent ofexposure.

They noted the models use formulas and statistical averages andit is difficult to make precise predictions about exposures facedby smaller primary companies with regional exposures. Windfootprints and numbers of tornadoes vary from storm to storm, andthat can lead to imprecision, they wrote.

According to the authors, demand surge can make insured lossescreep upward due to escalating construction prices. Normally, thissurge is 10 percent of insured loss, but with Katrina and Rita itcould hit 30- or 40 percent, they found.

Mr. Slack and Mr. Spoolstra said the industry is wellcapitalized and is able to withstand monster storms and earthquakeswith insured price tags in the range of $60-to-$120 billion.

However, they said there's a danger that numerous events couldoccur within a 12-month period and place a cumulative strain oncapital, leaving some insurance companies without reinsuranceprotection.

To protect their bottom lines, these same insurers "might havebeen prompted to buy fresh catastrophe cover from a reinsurancemarket that had its own losses," the paper said. "The industrywould have found itself in a period of massive demand and limited[insurance] capacity."

The paper questioned whether the industry's capital providerswould continue to maintain sufficient levels of support goingforward if a heavy natural catastrophe season occurred during thesame year as an unexpected loss, such as the Sept. 11, 2001terrorist attacks.

Given the rising catastrophic loss trends, "it is vital for theindustry to keep a perspective on the high level of risk it faces,"the paper said.

"Coastal Warning: The Rising Costs of Hurricane Frequency andSeverity" is online athttp://www.geinsurancesolutions.com/erccorporate/inst/ic/pp/nh/060213_warn.htm.