Because of the crisis, he said, many property deals are being renegotiated, or not completed at all. Every $100,000 of increased insurance costs, he said, reduces the property market value by $1.5 million. Increases between 50- and 500 percent are “adversely affecting many portfolios,” he added.

Against that backdrop, Mr. Miller pointed out that the industry has suffered its two worst loss years in more than 30 years–and loss rates are expected to double in the next 10 years with population growth and rising construction costs.

With this in mind, insurers are being forced to change how they price and model catastrophe risks, Mr. Miller said. Reinsurers have increased insurers' premiums, increased primary insurer retentions and cut limits. Catastrophe models have increased probable maximum losses (PML) and rating agencies are requiring insurers to increase capital to cover catastrophe risks in order to keep their ratings intact.

What this amounts to, he pointed out, is a 70 percent reduction in active catastrophic capacity. “Cat-exposed risks are definitely experiencing a crisis scenario,” Mr. Miller said.

The crisis, he continued, is not just limited to wind exposure, but extends to earthquake risks. Using Risk Management Solutions' new 6.0 model, rates could increase 30-to-60 percent for quake risks.

Adding to real estate market concerns is the potential loss of the Terrorism Risk Insurance Act coverage. Mr. Davis observed that without TRIA, the private market lacks the capacity to provide sufficient coverage. While coverage from acts of terrorism remains in effect in policies written through 2007, policies extending through 2008 are already witnessing exclusions.

He expected a capacity crunch for tier-one risks, such as properties in New York City, adding that the real estate market will be forced to turn to the standalone market, where capacity is limited.

If the government does not renew TRIA, one answer may be an industry pooling for terrorism risk. However, without U.S. government action to form such a program, Mr. Davis said it was not likely to happen.

The future of government involvement depends heavily on a report from the president's working group that was formed to explore the terrorism risk insurance question.

Mr. Madden and Mr. Miller pointed out that the most important thing their clients can do is provide detailed and accurate information about their risks to underwriters to get the best coverage and price possible. Without detailed information, they noted, insureds can expect to pay the highest premiums for their risks.

A replay of the presentation is available at: www.aon.com/us/about/events/web_seminar.jsp