Another speaker added that the record catastrophe losses are only part of the story. William J. Ashley, president and CEO of Glencoe Group Holdings LTD, a Bermuda-based insurer and reinsurer, said such things as changes in insurers' and reinsurers' perceptions, in catastrophe models and in the attitudes of rating agencies also have contributed to a major imbalance in catastrophe-reinsurance supply and demand. Illustrating just how severe that imbalance has become, Ashley noted that there was a point in catastrophe reinsurance renewals this year “where capacity couldn't be found at any price.” This condition existed primarily for insurers writing in Florida and California, he added.

One big change in the market, Ashley said, has been the revision of the various models that insurers and reinsurers use to determine their probable maximum losses from catastrophes. Ashley noted that although commercial property policies, unlike personal-lines policies, often include flood coverage, catastrophe models haven't taken that exposure into account. “So, 'surprise, surprise,' the models missed the losses from Katrina,” Ashley said, which was more a flood event than a windstorm event, particularly in Louisiana.

Ashley said the models also have not adequately taken into account the effects of storm surge, the action of wave wash in a hurricane; or demand surge, the increase in prices of construction materials and labor following a major catastrophe. The models also have ignored business income losses, he said. The result, he said, has been “garbage in, garbage out,” but that is changing in the revised models. As a result, insurers probable maximum losses are increasing, which has lowered the supply of coverage. as some insurers shed property business in catastrophe-prone areas to get their portfolios in line with what the models now predict.

Ashley said insurers and reinsurers also are becoming disillusioned with the tightening of building codes in catastrophe-prone areas, which theoretically should have lessened carriers' losses. One illustration of the problem has been the revisions in loss estimates associated with Hurricane Wilma, a relatively weak (category 1) storm that last year hit Miami, “which allegedly has the best building codes in the country,” Ashley said. The storm initially was reserved for $5 billion, he said, a figure that in nine months almost doubled to $9.3 billion. Wilma “has probably caught the industry more off-guard than any other loss” from the 2005 storm season, Ashley said.

The revisions in loss estimates have done nothing to enhance insurers' credibility with rating agencies, Ashley said, which in recent years have tightened their capital-adequacy standards significantly. That also has led to a reduction in the supply of catastrophe coverage, he said.

Simple fear and a reassessment of just what property is exposed to catastrophe losses also are affecting supply, Ashley said. Sea-surface temperatures have been rising, which some carriers fear may be the result of global warming. Regardless of the cause, the waters indisputably are warmer, Ashley said, and that unquestionably leads to greater hurricane activity. Ashley said there also is “an increased appreciation that everything has catastrophe exposures. … It may be hail or tornado, versus Atlantic wind, but it's all catastrophe-exposed.”

Both Colannino and Ashley noted that about $24 billion in new capacity has entered the reinsurance market this year, but Ashley said the effect on supply is not as large as it might at first appear. To begin with, about $13.4 billion went into replenishing the surplus of carriers affected by the catastrophes. “So that's not really new capital,” he said, “that's just reloading.”

Among the capital that came into the market was $7.7 billion raised by nine Bermuda-based start-up insurers. But rating agencies are demanding more diversification from start-ups these days, Ashley said. “They can't take that full $7.7 billion and employ it in California or Florida,” he said. “Some portion of that has to be diversified.”

The bottom line is that agents and their clients in such states cannot take much solace from the light 2006 hurricane season. For property-insurance rates and availability, the forecast remains stormy.