Retrocessional reinsurance hit by Katrina

Large losses incurred as a result of Katrina will hit the retrocessional reinsurance insurance purchased by reinsurers in order to spread their primary insurance company risks market hard, experts say.
Retrocessional reinsurance is one of the riskiest in the insurance industry, but if the industry avoids big losses, retrocessional reinsurers keep the premiums.
If losses from Katrina reach $25 billion, many retrocessional reinsurers could suffer big losses.
“Stocks that focus on retrocessional covers will likely be among the weakest as loss estimates grow,” Fox-Pitt, Kelton analysts explained to their clients. “Assuming that the loss is in the range of $20 billion, it should easily reach the retrocessional layers of the market.”
Last year, when four hurricanes smashed into Florida, retrocessional reinsurers avoided big losses because each individual event lacked the magnitude to trigger claims further along the reinsurance chain.
Repercussions of Katrina will be unlike that of the four storms in 2004 where retrocessional reinsurers avoided big losses because each hurricane lacked the magnitude to trigger claims further.
“Generally speaking, retrocessional covers attach at industry loss triggers of $5 billion, $10 billion or $15 billion,” Fox-Pitt, Kelton analysts explain. “Katrina will trigger at least two of these breakpoints, possibly the $15 billion trigger too.”
Bermuda-based PXRE Group Ltd. is the most exposed to these types of losses among the reinsurers approximately one-third of its written gross premiums in the year ending June 30 were for property retrocessional reinsurance. Lloyd’s of London also insures specialized risks and the Company expects “significant” insurance claims from Katrina, mainly stemming from damaged offshore energy installations, other property damage and business-interruption claims.
If traditional retrocessional reinsurers raise rates after from Katrina, customers may look elsewhere when they renew their treaties at the beginning of 2006.
Hedge funds may therefore grow if utilized in Katrina’s wake, as new hedge funds may not have any past losses.