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

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“The true fallout will occur in 2006 when the industry will beforced to determine its next steps,” said Chris Shea, nationaldirector for the property-casualty division of Ernst & YoungInsurance and Actuarial Advisory Services.

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

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

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

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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 interestingdeals are already taking shape in the life sector,” said RichDeHaan, Ernst & Young senior actuarial.

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

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

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