Hurricanes Should Shake Up Insurance Industry Status Quo

Although early indications are that much of the damage from Hurricanes Wilma, Rita and Katrina was not heavily reinsured outside the United States, London is likely to pick up a sizeable chunk of the tab simply because catastrophe business is one of its specialties. That was the consensus of participants at the first ACORD Forum here, which focused on London market reform efforts–primarily by introducing new standards into business processing.

Some here are even talking about another London "spiral" emerging, with the same exposures being insured by a tight circle of players, due to the amount of hurricane risk placed by reinsurers in the retrocessional market–much of which traditionally finds its way to London.

Looking ahead, Gerry Albanese, president and chief operating officer of Markel Corp., has no doubt that recent hurricanes will drive up rates. He added that the aftermath of the damage in New Orleans, Florida, Texas and elsewhere would also increase demand for coverage and bring more buyers into the market, keen to protect against such future windstorms.

Clem Booth, chairman and chief executive officer of Aon Re International, told delegates at the ACORD Forum that energy and offshore rates in particular would be dramatically affected by recent events. He added that many of the losses were not modeled, with the result that insurers had neither premium nor capital in place.

Grahame Millwater, chairman and CEO of Willis Re, also drew attention to the shortcomings of existing models in assessing the impact of hurricanes. It was clear, he said, that models are not capturing all available risk data and cautioned insurers against relying on their projections alone in assessing potential exposure.

Rating agencies also came in for criticism from Mr. Booth, who argued that the downgrading of insurers and reinsurers in recent weeks should have been done in August 2004. "We had the same exposures then," he said. "Ratings are only telling us what we know already. It would help if they were more prospective."

Looking at how technology will change the face of insurance, Matt Josefowicz, manager of the insurance group at Celent Communications, forecast that electronic risk-placing will increase. In the United States, he believes this trend will open up opportunities for smaller brokers who are particularly keen to work online.

As for insurers, many are using technology to gain a competitive advantage and rating agencies are taking note, he added. As an example of how technology is being harnessed, Mr. Josefowicz said some U.S. insurers have begun to implement micro-rate changes, enabling rapid and frequent responses to emerging trends in personal lines business.

Targeted use of information technology will enable insurers to maintain underwriting discipline, reduce costs and keep regulators happy by providing them on request with accurate audit trails, he said, adding: "It's about optimizing IT spending, not about simply spending more."

In London, Mr. Albanese believes that IT–especially the Internet–will inevitably reduce the transactional role of brokers. However, he is confident brokers will continue to play a significant role in the market in terms of delivering value-added services: "I can see that role being strengthened," he said.

The emphasis on transparency following New York Attorney General Eliot Spitzer's probes of bid-rigging and contingency fee abuse is also placing greater focus on the value added by brokers, according to Mr. Millwater of Willis Re. "Transparency will be very healthy for brokers," he said. "It makes you focus on what you do and the value you add."

Despite the hurricane losses and other challenges facing London, the experts here are convinced the market has a solid future.

Mr. Booth–originally from South Africa, now working for Aon Re and soon to transfer to German insurer Allianz–summed it up: "If the London market didn't exist already, you'd have to invent it, although you'd probably want to make it a little less complex than it is."

Massive storm losses are expected to impact premiums, demand for coverage, modeling systems and rating agencies