Catlin > Media > Press Releases > 2006 > Catlin CEO Assesses Potential Impact of 2006 Hurricane Season

Catlin CEO Assesses Potential Impact of 2006 Hurricane Season

4 October 2006

Highlights:

• Rates for non-catastrophe exposed classes of insurance and reinsurance likely to decrease if hurricane season is benign
• Rising economic values in hurricane exposed regions (e.g. Florida, US Gulf Coast) taxes insurance industry’s ability to provide sufficient risk capacity
• Capital markets could help fill this capacity shortage

LONDON – Premium rates for non-catastrophe exposed classes of property/casualty insurance and reinsurance worldwide could decrease more rapidly if the 2006 Atlantic hurricane season is benign, says Stephen Catlin, the chief executive of Catlin Group Limited (‘CGL’: London Stock Exchange), the international speciality property/casualty insurer and reinsurer.

However, he warned that it is far too early to categorise the 2006 hurricane season as mild.  “There is currently an amount of euphoria about the current hurricane season,” he said.  “While this euphoria grows more appropriate as the days pass, we must remember that the hurricane season does not end until 30 November.”

Even if there are few significant US hurricane losses during 2006, rates for catastrophe exposed classes of business, such as property catastrophe reinsurance, are not likely to decrease because the demand for this type of coverage still exceeds the supply, Stephen Catlin said.  Premium rates for these classes of insurance and reinsurance have risen sharply since the record series of hurricanes in 2005.

Stephen Catlin made these remarks during a lecture today at Lloyd’s of London, sponsored by the Insurance Institute of London.

If the 2006 hurricane season resembles the 2004 season, during which there were several large hurricanes but no single ‘mega-catastrophe’ like Hurricane Katrina, rates for catastrophe exposed classes of business would likely increase further, Stephen Catlin said.  Rates for non-catastrophe exposed business, such as casualty classes, would likely remain flat or increase slightly under this scenario, he said.

However, if the current hurricane season resembles the 2005 season – during which Hurricanes Katrina, Rita and Wilma and other storms caused insured damage exceeding US$60 billion – there could be a severe shortage of capacity for catastrophe exposed classes of business.  In addition, any further catastrophe losses sustained by insurers and reinsurers during 2006 would likely mean substantially increased rates for non-catastrophe exposed classes.

“At the end of the day, it is market forces which will decide the direction of rates.  And, no matter the outcome of the hurricane season, disciplined underwriting is needed for a strong marketplace,” he said.

There have been nine Atlantic tropical storms so far during the 2006 hurricane season, which began on 1 June.  Five  of these storms have reached hurricane strength.  The only one, however, to have reached landfall in the United States is Hurricane Ernesto, which caused relatively light damage.

The challenge that hurricanes pose to the global insurance and reinsurance industry has increased in recent years, not only because of the increasing number of severe storms but because of rapidly escalating property values in catastrophe exposed regions, like Florida and the US Gulf Coast, Stephen Catlin said.

“The catastrophe models – both the commercially available models and the models developed in-house – did not adequately capture the rise in economic values in Florida and along the Gulf Coast,” he said, referring to the extensive damage caused by the hurricanes of 2005.  “We got the economic values wrong, so we also got the insured values wrong and therefore we got the ‘PMLs’ wrong,” he said, referring to the probable maximum loss that an individual company would sustain from a catastrophic storm.

He said that individuals who wish to live in catastrophe exposed regions must assume financial responsibility for their decision, including bearing the high cost of insurance.  “Is it reasonable to expect state or federal governments to subsidise the cost of insuring properties in high risk areas?” he asked. “Is it reasonable to expect the insurance/reinsurance industry to do so?”

If the insurance industry does not have the capacity to provide sufficient coverage for the rising economic values in these areas, then the capital markets can help provide risk transfer, Stephen Catlin said.  In recent years, capital markets have become increasingly involved in the transfer of catastrophic risk through catastrophe bonds and so-called reinsurance ‘sidecars’, he noted.

Catlin announced last week that Catlin Insurance Company Ltd. of Bermuda (‘Catlin Bermuda’) intends to participate in a ‘catastrophe bond’ transaction.  Subject to completion of contractual arrangements, Catlin Bermuda intends to enter a catastrophe swap agreement that would provide it with coverage of up to US$200.25 million in the event of a series of severe natural catastrophes. 

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