Andrew Newman, who oversees casualty specialty business for reinsurance intermediary R.K. Carvill in London, led off the discussion by distinguishing the direct impact of Katrina on the liability market, which he believes is limited, from the indirect impact, which "will be more immediate and more significant."

While direct impacts could include issues relating to nursing home tragedies and perhaps some insurance agent E&O problems down the road, it's too early to tell whether there will be a "liability explosion" of losses arising out of the event, he said.

Turning to indirect impacts, he said, "I can see monoline carriers writing just catastrophe business finding casualty business much more attractive than they ever did before. I can see rating agency pressures....I can see general lines carriers wanting to hold onto their casualty business, because the capital they need to support their short-tail lines has gone up so much."

Like Mr. Newman, V.J. Dowling, managing partner of Dowling & Partners, based in Farmington, Conn., also suggested that a hardening casualty market, which some experts have forecast will carry over from property lines, is far from a done deal.

First, Mr. Dowling noted that Hurricanes Katrina, Rita and Wilma together will produce losses of $50-to-$60 billion after taxes. Comparing this to a worldwide capital base of $800-to-850 billion, or $420 billion in the United States, he said, storm losses might not have as "great an impact across all lines as some are suggesting."

However, "one thing [Mr. Newman] alluded to--what we are all concerned about--is the rating agency changes with respect to short-tail writers," particularly property-oriented reinsurers, and the ripple effect those changes might have, Mr. Dowling said.

The rating agencies are going to require more capital from the property writers. "You may see some of these former monoline writers being forced to put capacity into some of the specialty markets," he said.

Peter Porrino, head of worldwide insurance practice of Ernst & Young in New York, said "the recalibration of the rating agency models may be the single most important factor that's going to come into play." He explained that monoline catastrophe writers are going to have a very hard time making returns on equity that they've enjoyed in the past "without really substantial rate increases" that would be higher than anyone foresees.

"The question is, do you become more of a broad-based carrier writing more specialty lines?" he asked.

Mr. Newman questioned the wisdom of rating agencies favoring diversified business models over specialty or monoline models. He recalled rating agency pronouncements some years back, which said that specialized physicians mutual insurance companies could not garner top ratings. While Mr. Newman believes such insurers do an outstanding job, he said, "I wonder whether or not [such a company] can write coastal property...I'm not sure that [the rating agencies'] impact has been that smart."

Mr. Dowling suggested that rating agencies have shifted their thinking back and forth over the past decade. While they were supportive of monolines in the 1980s and early 1990s, they changed their models in the years that followed, putting in "diversification credits."

"9/11 blew that [thinking] out of the water," he said, "because all of a sudden non-correlated risks were deemed to be correlated, and the largest workers' compensation, largest property, large aviation and largest business interruption losses in history [came together] in one event." As a result, he added, rating agencies changed the models once again, favoring less diverse platforms.

Now, "we've had a new event," and the ratings agencies are shifting back again to a preference for multilines, he said, referring to the predominance of property-catastrophe losses in Katrina.

"I would respectfully suggest, for the folks in this room, [that] you ought to be thinking about what [the rating agencies] are going to do to you once they're done with short-tail companies," he warned professional liability underwriters. "The end result will be that you'll need more capital than you do now to write the same lines."

Mr. Porrino said rating agencies are "broadening their reach into the ways that companies operate" in a number of ways, noting initiatives in which they're looking into risk management practices and the corporate governance of individual insurers.

Mr. Dowling said rating firms ultimately decide "how much capital you need, what your rating is, and whether you can play," noting that they are more powerful than insurance regulators in these areas. "Everyone knows if you go below 'A' in certain long-tailed lines, or 'A-minus' in short-tailed lines, you're out of the game."

He added that "right now, the rating agencies will decide how much new capital is coming into this business"--referring to the fact that rating agencies are assessing capital adequacy and business plans of companies attempting to start-up new operations in Bermuda.

"Those discussions are going on as we speak," he said. "And if they give those companies [with] two men, a dog and $1 billion, 'A-minus' [ratings] to go start-up in Bermuda and operate--that has important implications for the overall market."

Mr. Porrino said that while rating agency preferences for diversified business platforms drive the cost of debt upward for specialists, equity providers of capital "have for the last five years really pushed specialization."

"If you look at where the [stock] valuations are, the more specialized companies have higher valuations and they're getting better returns than the broad-based companies," he said.

The panel's moderator--Robert Deutsch, a consultant for CNA--said he believes rating agencies have become more aggressive. Not only were they quick to downgrade carriers after Katrina, but the language of the press releases announcing the downgrades is more aggressive.

"They're using words and language they haven't used in the past," he said. Paraphrasing the language in a typical announcement, he said, the messages coming across sound like, "now these bozos in management have finally adapted the right underwriting standards."

Mr. Deutsch noted that the rating agencies have good reason for harsh words. "I do think, frankly, that some of them have been burned by companies," he said.

"I would respectfully suggest...[professional liability underwriters] ought to be thinking about what [the rating agencies] are going to do to you once they're done with short-tail companies. The end result will be that you'll need more capital than you do now to write the same lines."

V.J. Dowling, Managing Partner

Dowling & Partners