Insurers Will Have To Put Up More Capital: GE

Insurers and reinsurers will be forced to trim exposures or come up with more capital this year because of "dramatic" changes in catastrophe models and rating agency requirements, an insurance company analysis finds.

Jonathan Isherwood, Munich-based global product strategy leader for GE Insurance Solutions, said the changes "will have dramatic implications on insurers and reinsurers that write business in catastrophe-prone areas."

Mr. Isherwood wrote in the latest issue of Exposure, which is published by GE Insurance Solutions, that the likely effect of these changes is that insurers and reinsurers will need more capital or will have to reduce their peak-zone exposures.

Mr. Isherwood predicted that return on capital will fall and carriers may have to increase pricing levels "for key-zone catastrophe risks in order to obtain similar return on equity that they were able to earn before the changes."

In addition, Mr. Isherwood speculated that companies may seek to improve capital efficiency "by balancing and/or diversifying their portfolios away from peak-zone capital intense areas, which could cause overcapacity--and competition--in these desired zones."

Monoline catastrophe writers or companies that have a heavy concentration of catastrophe business "will be disadvantaged in this new environment," he asserted.

Mr. Isherwood joins a long line of industry analysts predicting a possible capacity crunch in the disaster-prone areas, particularly on the reinsurance side as carriers shy away from writing such coverage.

The Reinsurance Association of America noted that net written premium declined in the first quarter of this year, compared with the same period in 2005.

Bear Stearns analyst David Small said that Bermuda-based Everest Re and Renaissance Re have been among the few companies bucking the trend and exploiting higher prices in the property-catastrophe sector.