Fuelling renewal

A whole variety of Hurricane Katrina experiences, and its consequent repercussions, will be recounted in Baden-Baden next week, as the usual expedition of insurers, reinsurers and brokers descends on the German town for a series of meetings to set the pattern of next year's reinsurance programmes. Inevitably, there is an expectation that the market will see harder terms and conditions introduced, since it needs to restore the capital base that was absorbed by Katrina.

While there will be some insurers that can say with certainty that they have no involvement in this loss, many others are still trying to evaluate their final numbers - a process that could take some time, in view of the complexity of coverages involved. As an example of this, from an insurance standpoint, Peter Stoll, director at JL Manson, comments: "The majority of insurers in the New Orleans area will exclude flooding, which will be unfortunate for many homeowners as their insurance will not typically include cover for flood damage being underwritten by the federal government.

There will also be significant consequences for businesses, as they may not be covered for business interruption and for losses as a result of looting.

"There will undoubtedly be heated discussions between insurance adjusters, homeowners and the federal government over what water damage was caused as a result of the storm, and what is attributable to the flooding after the storm had passed, in addition to losses caused by social circumstances following the natural catastrophe."

Counting the numbers is clearly going to be an ongoing process and John O'Neill, actuarial partner at business analyst firm Mazars, says: "There are still quite a few unknowns, and most companies are unlikely to know the full extent of their loss for this renewal season. A big issue is that, apart from the usual difficulty associated with evaluating the loss, several companies are under tremendous pressure not to overstate the impact because of its sensitivity to their share price. So, there is tremendous pressure both ways to get accurate figures, which has led to a delay in some cases in putting the figures out."

Reduction of capacity

"Katrina is both extraordinary and unprecedented," adds Charles Werner Skrzynski, chief executive officer of XL Re Europe. "That does not mean the industry should be completely surprised - it can happen again. The complexity of the loss will potentially cause the claim to pay out much more slowly than previous catastrophe events - legal arguments, disputes over coverage, and extended periods of business interruption could all follow. The potential for these will need to be factored into reinsurers' pricing and models going forward."

XL Re will hold its third annual symposium on Sunday afternoon in Baden-Baden, with Mr Skrzynski confidently stating: "I'm sure that once more we shall manage to sell the products our clients need at an adequate price."

As to possible effects on market capacity, Dermot Flood, reinsurance broker at Cooper Gay, says: "There has been some capital raising in the market but so far it has been conducted by existing reinsurers and, although there is some talk of new companies being set up, I cannot foresee anything like the number we saw post-11 September 2001. The extent of damage to reinsurers is going to be drawn out, however, we will see a few casualties during the next few months. Capacity will reduce in the market, how and where it will be utilised will prove interesting."

Agreeing with his colleague's view, Frank Rieder, vice president of Cooper Gay Steele, adds: "Property catastrophe business will be looked at differently.

People are going to be a little bit more careful how they use their catastrophe capacity in future, and the information requirements will also change - with more emphasis on quality of information, for example. However, in addition, if you look at things in a more detailed and different way, you may come up with a different price - so it has an indirect effect on pricing in the future as well."

Gerald Konig, European origination leader at GE Insurance Solutions, comments: "We are sure the industry is changing and it is especially challenging with the magnitude of this event. For GE it is not a question of radical changes but rather that we continue what we have already started during the past couple of years. We aim for adequate pricing, for transparency, for risk assessment, and for risk control. This event has just reinforced how important that is."

Mr Konig reports that his company has already been asking for full exposure information, including risk profiles but it recognises that this takes a lot of effort and requires a lot of co-operation from the insurance companies it reinsures. He says: "The whole industry is working on this now, which is positive."

There seems to be a mixed picture as to whether the renewal season is likely to be delayed, while people come to terms with their losses, but Mr Konig says: "We are ready, we don't have capital issues. We have a clear message that we are there and we are a long-term reliable partner.

Our message does not change. Transparency, adequate pricing, controlled volatility - that's the core of the message. What is for sure, and this will be my recommendation to all of our clients, is that they should not wait for the good deal at the year end, for the cheaper bargain, for some last minute things. My expectation is that this will not happen this year."