Here we are in November, and it looks as if the insuranceindustry is going to experience a 2006 hurricane season that is asmild as the 2005 season was wild. Unfortunately, that doesn't meanthat agents in Southeast coastal areas will find much improvement,if any, in the windstorm market next year. Same goes for Californiaagents struggling to place earthquake coverage.

Just why these markets will continue to be in a bind was spelledout at last month's annual meeting of the Target Markets ProgramAdministrators Association, which was held in Tempe, Ariz. Some 500people were on hand for the meeting, which has attracted a steadilyincreasing number of attendees since it first was held a monthafter 9/11. Greg Thompson, president of Thomco, took over as theassociation's president.

Among the speakers at the meeting was Andrew Colannino, vicepresident of the property-casualty ratings division of A.M. BestCo. Thanks to sub-100 combined ratios and reasonable pricingdiscipline so far, the industry overall should turn in strongoperating results in 2006 and 2007, Colannino said. The outlook for2008 through 2010 is not as sanguine, however, particularly forcommercial lines. “We think that the pricing is going to continueto deteriorate,” he said, “and that terms and conditions might giveway a bit.”

The market for catastrophe-exposed property, however, is anothermatter. Conditions in it are affected greatly by reinsurance and,as Colannino noted, the record $56.8 billion in 2005 catastrophelosses, following on the heels of a $27.3 billion loss in 2004,have affected the reinsurance sector of the insurance industry morethan any other.

Another speaker added that the record catastrophe losses areonly part of the story. William J. Ashley, president and CEO ofGlencoe Group Holdings LTD, a Bermuda-based insurer and reinsurer,said such things as changes in insurers' and reinsurers'perceptions, in catastrophe models and in the attitudes of ratingagencies also have contributed to a major imbalance incatastrophe-reinsurance supply and demand. Illustrating just howsevere that imbalance has become, Ashley noted that there was apoint in catastrophe reinsurance renewals this year “where capacitycouldn't be found at any price.” This condition existed primarilyfor insurers writing in Florida and California, he added.

One big change in the market, Ashley said, has been the revisionof the various models that insurers and reinsurers use to determinetheir probable maximum losses from catastrophes. Ashley noted thatalthough commercial property policies, unlike personal-linespolicies, often include flood coverage, catastrophe models haven'ttaken that exposure into account. “So, 'surprise, surprise,' themodels missed the losses from Katrina,” Ashley said, which was morea flood event than a windstorm event, particularly inLouisiana.

Ashley said the models also have not adequately taken intoaccount the effects of storm surge, the action of wave wash in ahurricane; or demand surge, the increase in prices of constructionmaterials and labor following a major catastrophe. The models alsohave ignored business income losses, he said. The result, he said,has been “garbage in, garbage out,” but that is changing in therevised models. As a result, insurers probable maximum losses areincreasing, which has lowered the supply of coverage. as someinsurers shed property business in catastrophe-prone areas to gettheir portfolios in line with what the models now predict.

Ashley said insurers and reinsurers also are becomingdisillusioned with the tightening of building codes incatastrophe-prone areas, which theoretically should have lessenedcarriers' losses. One illustration of the problem has been therevisions in loss estimates associated with Hurricane Wilma, arelatively weak (category 1) storm that last year hit Miami, “whichallegedly has the best building codes in the country,” Ashley said.The storm initially was reserved for $5 billion, he said, a figurethat in nine months almost doubled to $9.3 billion. Wilma “hasprobably caught the industry more off-guard than any other loss”from the 2005 storm season, Ashley said.

The revisions in loss estimates have done nothing to enhanceinsurers' credibility with rating agencies, Ashley said, which inrecent years have tightened their capital-adequacy standardssignificantly. That also has led to a reduction in the supply ofcatastrophe coverage, he said.

Simple fear and a reassessment of just what property is exposedto catastrophe losses also are affecting supply, Ashley said.Sea-surface temperatures have been rising, which some carriers fearmay be the result of global warming. Regardless of the cause, thewaters indisputably are warmer, Ashley said, and thatunquestionably leads to greater hurricane activity. Ashley saidthere also is “an increased appreciation that everything hascatastrophe exposures. … It may be hail or tornado, versus Atlanticwind, but it's all catastrophe-exposed.”

Both Colannino and Ashley noted that about $24 billion in newcapacity has entered the reinsurance market this year, but Ashleysaid the effect on supply is not as large as it might at firstappear. To begin with, about $13.4 billion went into replenishingthe surplus of carriers affected by the catastrophes. “So that'snot really new capital,” he said, “that's just reloading.”

Among the capital that came into the market was $7.7 billionraised by nine Bermuda-based start-up insurers. But rating agenciesare demanding more diversification from start-ups these days,Ashley said. “They can't take that full $7.7 billion and employ itin California or Florida,” he said. “Some portion of that has to bediversified.”

The bottom line is that agents and their clients in such statescannot take much solace from the light 2006 hurricane season. Forproperty-insurance rates and availability, the forecast remainsstormy.