A 9/11 event that combines with severe hurricanes to create a 12 month loss above $120 billion could tap out reinsurance sources for insurers, a paper from GE Insurance Solutions predicts.

The report also noted that intense coastal development means the cost of hurricanes is rising and will eventually outstrip Hurricane Katrina, which caused $38 billion in insured losses.

The commentary is titled "Coastal Warning: The Rising Costs of Hurricane Frequency and Severity."

While increased frequency of hurricanes is nothing new in historical terms, the enormous growth in coastal population and development is dramatically increasing the potential for insured losses, GE Insurance Solutions said.

"Demographic trends in Florida and other coastal locations as well as the likelihood of increased frequency and severity of storms should remind the [insurance] industry of the growing exposures it will continue to face. The cost of hurricanes will rise--sooner or later surpassing even those of Hurricane Katrina," said the paper.

Kenneth Slack, senior underwriter, global property catastrophe reinsurance, and Larry Spoolstra, chief underwriting officer for North America and Asia Pacific p-c reinsurance, at GE Insurance Solutions, co-authored the paper.

The authors said there's a perception that Hurricane Katrina created an insured loss that was unforeseen. They noted, however, that it was well within the expected range of events anticipated by the insurance industry.

However, they cautioned that Katrina may have demonstrated that insurers' loss forecast models underestimated the extent of exposure.

They noted the models use formulas and statistical averages and it is difficult to make precise predictions about exposures faced by smaller primary companies with regional exposures. Wind footprints and numbers of tornadoes vary from storm to storm, and that can lead to imprecision, they wrote.

According to the authors, demand surge can make insured losses creep upward due to escalating construction prices. Normally, this surge is 10 percent of insured loss, but with Katrina and Rita it could hit 30- or 40 percent, they found.

Mr. Slack and Mr. Spoolstra said the industry is well capitalized and is able to withstand monster storms and earthquakes with insured price tags in the range of $60-to-$120 billion.

However, they said there's a danger that numerous events could occur within a 12-month period and place a cumulative strain on capital, leaving some insurance companies without reinsurance protection.

To protect their bottom lines, these same insurers "might have been prompted to buy fresh catastrophe cover from a reinsurance market that had its own losses," the paper said. "The industry would have found itself in a period of massive demand and limited [insurance] capacity."

The paper questioned whether the industry's capital providers would continue to maintain sufficient levels of support going forward if a heavy natural catastrophe season occurred during the same year as an unexpected loss, such as the Sept. 11, 2001 terrorist attacks.

Given the rising catastrophic loss trends, "it is vital for the industry to keep a perspective on the high level of risk it faces," the paper said.

"Coastal Warning: The Rising Costs of Hurricane Frequency and Severity" is online at http://www.geinsurancesolutions.com/erccorporate/inst/ic/pp/nh/060213_warn.htm.

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