Record Storm Claims Prompt A Boost In London Market Pricing, Capacity

As a result, forecasts of a fall in Lloyd's 2006 capacity have been torn up and replaced by estimates that it could rise anywhere from 5 percent to around 10 percent above this year's ?13.7 billion ($23.7 billion, in current exchange rates).

That would take Lloyd's capacity close to the previous record of ?15.1 billion in 2004 ($26.1 billion today)–and it is worth remembering, too, that few underwriters used up all their capacity this year.

Catlin Group is one of the many Lloyd's insurers planning a capacity increase, whereas before Katrina it was considering a 5-to-10 percent cut. "With some of the rate corrections, I would expect next year to be up maybe 15 percent," says Chief Operating Officer Paul Jardine.

Catlin is better placed than most to judge the U.S. market in the wake of Katrina. It has an office in New Orleans (re-opened after temporarily evacuating to Houston) and is setting up an admitted operation to develop its U.S. business further. However, despite the increased capacity, Mr. Jardine believes Catlin's actual U.S. risk exposure will be lower in 2006 than in 2005 because of likely rate rises.

The company market in London, represented by the International Underwriting Association–which is roughly equivalent to Lloyd's in volume terms–also anticipates an increase in 2005 capacity and is optimistic about meeting the needs of U.S. customers. LIU Chief Executive Officer Dave Matcham assures U.S. clients that "the London company market is there–ready, willing and able to write their business."

Mr. Matcham concedes that, in view of 2005′s catastrophe losses, reinsurers might amend products or seek higher retentions, but he added it is "a little early to see what the patterns will be at this stage."

Others suggest that capacity might be in short supply in the retrocession market. Again, that could force some reinsurers to adjust the business they write, but should not lead to widespread shortages of primary capacity in London.

Rate Reversal

No one doubts that some rates will rise after the more than $50 billion in U.S. hurricane losses this year. The question is, by how much?

Lloyd's insurer Kiln expects "underwriting conditions in its core specialist areas in 2006 to be attractive, with overall rate increases of 12.5 percent. Individual property risks, U.S. catastrophe reinsurance risks and offshore energy risks are forecast to increase by 23 percent, 23 percent and 46 percent, respectively."

Kiln's forecast accompanied a rights issue, and few others have been so specific.

However, although many rates will increase, London does not expect 2006 to see dramatic rises across the board. Mr. Jardine of Catlin, for example, reckons it will be "a challenging year, but I don't think it's going to be like 2002″–when an already hardening market combined with the aftermath of 9/11 to send premiums sharply higher.

Moreover, the effects of the hurricanes were concentrated in the energy and property sectors, leaving liability and other areas largely unscathed. That said, pressure on insurer capital following the hurricane losses is expected to choke off softening trends in at least some of these otherwise unaffected areas.

Ahead of an annual survey of London market underwriters, Robert Smith, a senior analyst at Moody's in London, said his "expectation is that we will be looking for the overall picture to go back up to about 2004 levels–back toward the harder part of the market. The question mark is over those areas not directly affected by the 2005 hurricanes–including, in particular, liability rates, terms and conditions."

As for the lines affected by the hurricanes, there is some talk of energy rates jumping three-, four- or even fivefold. However, that kind of increase has not been confirmed, and if it does occur, policyholders could vote with their feet.

"You have to bear in mind that clients may well have other options, such as self-insurance, captives and bigger deductibles," noted Barrie Cornes, director of investor relations at broker JLT Group.

Mr. Cornes adds, however, that the full impact of the hurricanes will not be known until early next year. "We are not seeing the non-affected areas having rating increases across the piece as yet. It may or may not occur. We won't get a real feel for that until the reinsurance renewal season."

What people do agree on, however, is that this year's reinsurance renewals look set to drag on longer than normal. The reasons are simple–conflicting market pressures, the need to review the role of catastrophe models, and an upset to earlier expectations that the market would continue to soften.

Cautious Capital

Despite the prospect of a tortuous renewal season, most London insurers believe they have the resources to take advantage of the opportunities ahead. Others–including Lloyd's companies Amlin, Hiscox and Kiln–are asking shareholders for extra cash, but not on the scale seen in Bermuda.

The reason for this, argue those in the market, is that the hurricanes might have eaten into the profits of London insurers, but did not as a rule swallow up their capital. As one observer commented, capital raising in London is "focused on taking advantage of opportunities rather than rebuilding balance sheets in order to survive."

Those opportunities go hand in hand with risk, and in the past plenty of capital has gone up in smoke by entering the market at a similar juncture. However, Catlin, for one, is aware of those risks.

"There is a pattern to hurricane activity and sea temperatures. I don't see the sea temperatures, particularly in the Gulf, dropping significantly next year," warns Mr. Jardine, who is an actuary by training. "Therefore I would say we're going to see a very active catastrophe year in 2006."

Caption:

Before Katrina, the mood around Lime Street was glum, with falling rates and lower capacity on tap, but now London expects just the reverse.

Flag: Outlook

Head: What's Ahead For Reinsurance?

Primary rates are expected to rise to make up for catastrophe losses, but no one is sure by how much, or whether all lines will be equally affected, or even at all.

However, Londoners seem to agree that this year's reinsurance renewals will drag on longer than normal because of:

o Conflicting pressures in the market, with some licking their wounds after disaster losses, but others eager to capitalize on rising primary rates.

o The need to review the role of catastrophe models–can reinsurers be certain of their exposures?

o A cautious response following earlier expectations that the market would continue to soften.