For the property-casualty industry 2005 will be remembered as the year doubt was cast upon catastrophe models, according to a new report from Ernst & Young.

“The true fallout will occur in 2006 when the industry will be forced to determine its next steps,” said Chris Shea, national director for the property-casualty division of Ernst & Young Insurance and Actuarial Advisory Services.

The group's 2006 Industry Outlook forecast that “it will be a crucial period as P-C insurers decide if they will continue to retain and manage catastrophe risk, or if they turn to the capital markets, which could create a significant chain reaction.”

History can offer valuable lessons as P-C insurers make their next move, Ernst & Young advised. It noted that in 1985-86, commercial writers, driven by anemic results, withdrew liability capacity from the market. “Unfortunately, this move triggered an unwanted market response as numerous companies chose to self-insure rather than pay rising premiums,” the report stated.

“If the industry is not thoughtful in its response to recent catastrophe issues, it could set off a series of events leading to premium leaving the market. Now is the time to carefully weigh the options and examine the risk-reward of the potential next steps,” Mr. Shea said.

As for mega-deal mergers and acquisitions activity, consolidation will continue to be a part of industry landscape. “Less activity is expected on the P-C side, but some interesting deals are already taking shape in the life sector,” said Rich DeHaan, Ernst & Young senior actuarial.

Anticipated rate increases on the P-C side, the firm said, will mean few companies will be forced to put themselves up for sale. “On the life side, the real M&A action will take place around small and midsized deals strategically targeting closed blocks, distribution channels or specific product lines,” he said.

The report also forecasts much more capital market activity through securitizations for the life side.

Special Reports /

Catastrophe Models Under Fire

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