NU Online News Service, June 30, 2:45 p.m.EDT

For U.S. coastal property business, “the market’s capital hasfelt ‘three Katrinas,’” according to experts at a reinsurancebroker, which previously speculated it would take three Katrina-sized eventsto push up reinsurance prices.

In a report on midyear conditions in the reinsurance marketpreviewed by NU today, Holborn, a New York-based reinsuranceintermediary, says that so far, however, the impact has been“capacity tightening more than pricing.”

The report, which will be released on Friday, recounts thecombination of events that amount to nearly $60 billion inlosses—three-times the estimated $20 billion in after-tax lossessuffered by reinsurers from Hurricane Katrina in 2005. The2010-2011 events are:

• A Katrina-sized loss in Japan in first-quarter 2011.

• An equivalent-sized combination of other losses over the last15 months, which includes the Chilean earthquake, the DeepwaterHorizon explosion, the September 2010 earthquake in New Zealand,and another in February 2011, as well as floods in Australia earlythis year.

• Record levels of U.S. tornado losses in the second quarter of 2011.

With recent model changes—RMS Version 11 and AIR Version 12 to alesser extent—requiring reinsurers to assign more capital tocatastrophe exposures, the U.S. coastal property market has felt acapital impact like “three Katrinas,” Holborn says, putting amidpoint estimate of large reinsurance losses (those over 0.5percent of industry net earned premium) for the 2010 at $19.8billion, and estimating a $43.5 billion reinsurance market impactfor the 2011 events.

According to the report, the $19.8 billion for 2010 represented9.2 percent of gross premiums and a 9.4 percent hit to capital atyear-end 2009. The 2011 loss total of $43.5 billion through thefirst half represents 20.2 percent of premiums and a similar hit toyear-end 2010 capital, the report says.

Separately, Willis Re estimates that natural catastrophes havecost reinsurers roughly $48 billion over the past 16 months.

The Holborn report notes large losses for 2010 and 2011 togetherrepresents the worst two-year block of large losses to thereinsurance industry in dollars. In addition, as a percentage ofboth premiums and surplus, large losses for the 2010-2011 periodwere worse than the 2004-2005 period, Holborn says.

Comparatively, the 2004-2005 period netted roughly $28.0 billionin large losses to reinsurers, Holborn estimates. In 2005, the yearof Katrina, large losses represented 15.1 percent of gross premiumsfor reinsurers and 19.3 percent of year-end 2004 capital.

In addition to the higher dollar-value of large losses, Holbornsays the higher percentage of premium for 2010-2011 period is, inpart, attributable to depressed property values and soft-marketpolicy terms, and speculates that “both will continue into 2012,”in spite some recent rate increases.

Although Holborn says property catastrophe-reinsurance ratehikes for coastal-exposed programs were in the 0-20 percent range(for accounts without recent losses), other classes of businessthat have not had model changes or do not rely as much on capitallevels, have had more stable pricing, according to the report.

Looking ahead, the broker says the overall pricing environmentat year-end will depend on loss experience in wind season and“financial factors.”

Turning to some key financial indicators, Holborn, estimatesthat the global reinsurance industry:

• Turned in a combined ratio of 88.3 in 2010, roughly two pointshigher than in 2009

• Will report a combined ratio in the 105-115 range for 2011,assuming no further worldwide events above $5 billion in directlosses.

• Saw a decline in net earned premiums of about 2 percent in2010 to $184 billion, and will see flat volume at year-end2011—with midyear rate increases failing to outpace earlierdeclines.

• Saw the overall worldwide capital level grow to $215 billionin 2010.

• Will report an aggregate capital level in the range of$205-$215 billion in 2011.

Holborn also believes reinsurers’ reserves “weakened by a least$10 billion during 2010, overstating income.” The broker explainsthat in addition to booking reserve savings on casualty businessfor prior years, reinsurers had not booked the Chile and earlierNew Zealand earthquakes and December Australian floods to theirultimate values at year-end 2010.