NU Online News Service

New York --New catastrophe models may push catastrophe insurance rates up as much as 30 percent, according to an insurance company expert.

The observation came during Swiss Re's annual year-end "Economic and Insurance Industry Review of 2005 and Outlook for 2006" forum held here today.

However, Swiss Re management cautioned it is still too early to know for certain how much rates will eventually rise as a result of this past season's hurricanes.

Discussing the past hurricane season and the losses incurred by the industry, executives said the models used to underwrite the risks did not fail to predict losses but lacked information for what turned out to be the unexpected.

"Models are only tools, and are only as good as the data that goes into the models," said Patrick Mailloux, president and chief executive officer of Swiss Re America Corporation.

He said the weakness in the models used to underwrite risk where hurricanes struck the Gulf Coast this past season "led to underestimation of risk and capital to support the exposure."

This is leading to increased demands from rating agencies to gain greater capital, he noted, and the reinsurers are turning to the investment markets to adequately shore up their books.

Andrew Castaldi, head of catastrophe and perils unit, property-casualty, noted scientific evidence that indicates the hurricane season is in a cycle of increased activity. He said that cycle, which could run in a 20-to-40-year period, could be in its first third of increased activity--just entering the peak of activity--meaning more hurricanes for a few more years.

Noting the damage to the Gulf Coast, he said that if a similar path of destruction hit the New York metropolitan area, the destruction could run from Brooklyn east to the end of Long Island, creating untold damage up to a mile inland.

He added that looking at cycles, there should be concern over increased earthquake activity. Some believe, he noted, that the California region is due for a quake of 6.2 or higher on the Richter scale.

Newly formed catastrophe models, based on recent experience, Mr. Castaldi said, could cause catastrophe rates to increase as much as 30 percent, but he added that it is still too early to know if this will be the case.

Mr. Mailloux noted that while this season is turning out to be a late one, whatever the rate increases turn out to be, they will be client specific. He added that "a substantial part of [Swiss Re's] book is still being rated at this time."

Andreas Beerli, CEO of Americas Division, who will become the company's chief operating officer Jan. 1, noted that there will be a continued need for precise underwriting. He said it still remains tough for insurers to get strong investment returns from the bond market where they traditionally turn.

"Insurers need to be focused on underwriting returns," said Mr. Beerli. "Underwriting discipline remains essential."

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