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Regulators, Mulling Catastrophe Plan, Get Answers on Private Reinsurance Capacity

HAMILTON, Bermuda April 18 (BestWire) — As the National Association of Insurance Commissioners advances its plan for managing the risk of so-called "mega" catastrophes, reinsurers are stepping up to show how much capacity the market can provide.

But no matter what capacity limit the industry might arrive at, leaders at the NAIC are staunch in their argument that, at some point, "the wheels fall off."

In a survey of 28 leading reinsurance markets by the World Insurance Forum, respondents estimated that the maximum amount of property catastrophe excess-of-loss reinsurance coverage that is purchased and would attach to any one large U.S. natural disaster ranged from $27 billion to $75 billion.

Added to that would be further coverage respondents estimated property/casualty insurers might purchase in proportional, per-risk excess and facultative coverage that protects them from catastrophic loss above excess-of-loss reinsurance coverage.

The survey also notes that, despite record natural disaster and man-made catastrophe losses in the past five years, no claims have gone unpaid because of the insolvency of any respondent to the survey.

"The report makes a pretty clear case that state funds and federal funds are not needed," said Frank Nutter, president of the Reinsurance Association of America. "The industry's resilient, and the capital is sufficient. Where there are problems, they are largely driven by the need for adequate rates reflecting the catastrophe exposure."

Florida Insurance Commissioner Kevin McCarty, who heads the NAIC group that's pushing for a national natural catastrophe risk plan, said while he agrees loosening restrictions on rates might serve to boost capital growth, the insurance industry shouldn't take lightly the notion of a comprehensive national plan for catastrophe risk.

"To constantly keep saying that the reinsurance market is there, well, it's there until it doesn't work, and then the federal government comes in," McCarty said. "That's an irresponsible way of dealing with natural disasters. We're talking about coastal mitigation, retrofitting, a comprehensive plan that involves local and state government and how to protect lives and property. Just to stick your head in the sand and say when all the wheels fall off, then come up with a national plan, that's not an answer."

Along with Nutter, Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, helped to administer the survey to leading property reinsurers domiciled in Bermuda and the United States and to reinsurance brokers. The biennial World Insurance Forum is hosted each year by the Bermuda Insurance Symposium and sponsored by the industry.

Kading, who compiled the survey results, offered to share the document when the question of reinsurance capacity was raised during a recent NAIC conference call.

One key factor that's hard to pin down is the percentage point at which industry surplus should be exposed to a single natural disaster event. From rating agencies, individual cedents and brokers, the answer differs, Kading said.

"Every insurer has a different number based in individual risk appetites," he said, adding that before a government backstop arrives to scoop up business that otherwise would be taken by reinsurers, policymakers need to first settle on a number.

According to the Insurance Services Office, the storms of 2005 caused about $52.7 billion in insured losses, both in homeowners and business claims. According to the RAA, U.S. reinsurers in 2005 experienced a $7.45 billion full-year underwriting loss caused by the impact of the three major U.S. Gulf coast hurricanes.

"Clearly, that number has to be greater than what's occurred to date. In 2005, there were no insolvencies from these events, and basically the private sector demonstrated that it can withstand a very large catastrophe," Kading said.

"There is some event in the U.S. at which you exhaust private-sector capacity. There needs to be research done to find out what that number is," Kading said.
(By Eleanor Barrett, senior associate editor, BestWeek: eleanor.barrett@ambest.com) BN-NJ-04-18-2006 1602 ET #

Copyright © 2006 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. Reprinted with permission.