Florida Has Reinsurers' Attention

NEW YORK--With the hurricane season starting today, reinsurers find close to 30 percent of their catastrophe capacity dedicated to Florida, but they are still in good shape to bear a couple of major loss events, said a reinsurance broker.

"All eyes will be watching the sunshine state this summer and fall," said David Priebe, global head of Guy Carpenter's Specialty Groups.

His remarks came during a press conference held today at the offices of New York-based Marsh & McLennan Companies to discuss how commercial clients should prepare for the consequences of a major storm.

Mr. Priebe said that globally there is $142 billion of catastrophe reinsurance capacity. Of that, $60 billion is dedicated to the United States and $40 billion to Florida.

Last year's benign hurricane season allowed the reinsurance industry to recover from 2005 losses from Hurricane Katrina and a number of other costly storms, said Mr. Priebe. Insured catastrophe losses stood at more than $60 billion that year--the worst on record. The inflow of new capital from sidecars (special purpose reinsurance entities) and catastrophe bonds have also helped to reinvigorate reinsurers.

The reinsurance industry, he said, is in a "healthy position" today to withstand one or two major events.

"We are pretty bullish about the industry," he said.

However, the state legislature's expansion of Florida's Hurricane Catastrophe Fund to provide low cost reinsurance concerns the industry. He called the program a burden on Florida because a catastrophe would mean residents footing the bill to repay the program.

"We're keeping our fingers crossed that they will be as lucky as last year," he said. "They need a loss-free year."

Responding to a question on the probable effects of a Miami Hurricane strike that produced a $100 billion insured loss, he said Citizens Property Insurance Corporation, the state's insurer of last resort, and the state's primary insurer, would have a probable maximum loss of $25 billion.

The reinsurance industry would have a probable maximum loss of from $30-to-$35 billion, and primary insurers would hold the rest of the loss from such an event, Mr. Priebe said.

The current set-up, he said, has a troubling future because it raises questions about how much bonding the state can afford.

"We're very concerned about the state," said Mr. Priebe.

He said reinsurance pricing on the whole has dropped 10-to-20 percent. One reason for this is Florida's expansion of its cat fund, he said. With the extra capacity that was created, insurers are purchasing more limits.

The average reinsurance rate has dropped 10-to-15 percent, but not by the 20 percent or more that Florida Gov. Charlie Crist said would be the case, Mr. Priebe added.

Robert W. O'Brien, senior vice president, and Kenneth Giambagno, managing director of forensic accounting and claims services, both with insurance broker Marsh, said there were many lessons learned from the 2005 storm season.

A major lesson is the need for planning for recovery after a major event. Clients not only need to make sure they have the proper insurance coverage in place but also should plan for various loss scenarios that can interrupt their business and recovery.

Howard Levine, principal at Mercer Human Resource Consulting, said employers need to consider imaginative ways to deal with their employees in disaster situations, sometimes examining the legality of work rules in order to accommodate employees dealing with catastrophes. He said this might include relaxing benefit requirements and paying wages while employees are unable to work.

"The issue is how to help without breaking the bank," he said.

Mike Burmeister, director of data recovery operations for Kroll, noted that despite the best planning, catastrophes can cover a wide range of territory including where it was thought the backup data would be safe. He said planning should include this worst-case scenario.

Marsh, Mercer, reinsurance broker Guy Carpenter and Kroll are subsidiaries of MMC.