Catastrophic losses lead to higher reinsurance costs

Reinsurance costs will likely see an increase next year as a result of 2005’s catastrophic hurricane season. Hurricane Katrina and the other major hurricanes of 2005 will lead to an increase in reinsurance costs next year, executive vice president and chief financial officer of Arch Capital Group Ltd. (ACGL) John D. Vollaro reports.
Presenting at a Lehman Brothers property/casualty and life insurance summit for insurance company chief executives recently held in New York, Vollaro said that property reinsurance prices will rise and stressed “in some cases very dramatically.” Offshore energy reinsurance, Vollaro predicts, will go up “significantly.”
Revisions of catastrophe models, Vollaro expects, will raise estimates for the costs of catastrophes and lead to more demand for reinsurance.
Vollaro, Danny Hale, Allstate’s chief financial officer and Steven Bensinger, chief financial officer of AIG, all agreed at the conference that an improvement in catastrophe models used to predict potential losses from hurricanes and earthquakes is needed.
Hale said there was an observable difference between the performance of models that estimated losses for commercial compared to personal lines of insurance.
Working with modelers, Hale hoped to integrate the cycle of more frequent hurricanes in the Atlantic region into models as well as refine estimates for demand surge.
Risk models, according to Bensinger, need to ramp up there information on flooding, civil disorder and demand surges as well as what materials and labour prices will increase after catastrophes due to shortages.