London, UK - 2 December 2005, 16:45 GMT - Response: Morley Speed; Michael Wade; ATCA: 2005 Hurricane season ends; Lloyd's of London warns of potential loss; Payouts to exceed 9/11; Most records shattered; Huge uninsured losses.

Dear ATCA Colleagues

We are grateful to Morley Speed for his personal views in regard to The 2005 Hurricane Season.

Morley Speed is Managing Director of the Reinsurance Division of HSBC Insurance Brokers. Morley joined the insurance industry in 1978 with Sun Alliance, establishing the new reinsurance division at HSBC in 1988. He is a member of the Underwriting Advisory Committee at Lloyd’s of London. He is also a Fellow of the Chartered Insurance Institute and a Vice President of the London Institute, having served as Chairman of the Advanced Studies Committee. He writes:

Dear DK

The 2005 HURRICANE SEASON

There has been much talk in the Reinsurance Market of whether ‘Katrina’, and its accompanying hurricanes, represent a defining moment for the insurance industry, in the same way as the World Trade Centre in 2001. Although the losses from the 2005 hurricane season will exceed those from the World Trade Centre, there are some important distinctions:

a) In 2001 the market was at the bottom of the cycle and was primed to rise should a major event occur. In 2005 the market was arguably midway on a downward cycle. It is therefore felt that although those classes of business most affected by the hurricanes (property, marine and energy) will harden, there will continue to be softening in other markets.

World Trade Centre affected a wide range of classes of business (the so-called contagion effect) and consequently caused a consistent rate hike across and throughout the industry.

b) The hurricane season of 2005 was entirely predictable. While the frequency of severe hurricanes may have been unforeseen, the characteristics of each individual hurricane could have been anticipated.

While the World Trade Centre could have been predicted to some extent, its psychological impact was profound. Many Insurers responded by saying that such random, man-made events could not be underwritten. Ironically some Reinsurers are now suggesting that neither can hurricanes be underwritten – but due to their very predictability.

c) The exposure to hurricanes is geographically driven, whereas the threat of terrorism is global.

While the insurance-buying public could understand the need for a global increase in rates following the World Trade Centre, there is no such sentiment with regard to hurricane losses. Many insurers in Europe are questioning the need to pay higher reinsurance rates to pay for claims in North America involving floating casinos in hurricane zones.

d) The Insurance industry was severely capital depleted in 2001. By contrast in 2005 the Balance Sheets of insurers are in a much stronger position – the name of the game now is ‘ROE pick-up’ [Return on Equity pick-up] rather than survival. Many sectors/territories in the market do not feel the need to review their specific strategies; in fact some areas of business remain extremely competitive with rates reducing by up to 50%.

Taking these distinctions into account it can be seen that it is unlikely the 2005 Hurricane Season will be a defining event on the scale of the World Trade Centre. That is the initial view anyway. There may be more long-term trends at work which could be obscured by certain short-term factors. These long-term trends may result in ‘Katrina’ being a ‘tipping’ event, if not a defining one.

Chief among these is the superabundance of capital currently available to bankroll the Reinsurance industry. Latest estimates put this figure at about USD 15 billion, as compared to the USD 8 billion or so raised after World Trade Centre. This must be seen in the context of the current ‘savings glut’ in the global economy. If anyone need persuasion of the desperation of investors, witness the recent Dana Gas IPO, which was oversubscribed 140 times and raised a total of USD 78 billion.

All sorts of financial entities are now participating in the reinsurance market, most notably hedge funds. However one has to ask how resilient these investors will be, should there be a repeat of the 2005 hurricane season. Of course this is the critical question. Unfortunately, the preconditions for increased hurricane activity seem to be embedded in the current cycle of increased sea temperatures. More generally 2005 has seen an increase in weather activity which can only be assumed to be a function of global warming, viz: storms in Scandinavia, record-breaking monsoon rains in Mumbai, India, and floods in Switzerland.

In such an environment one would have to consider carefully whether one wanted to ‘roll the dice’ again on a Gulf hurricane. Although there is much new capacity (much of which has an appetite for the Gulf and Caribbean regions) there are some Reinsurers who are withdrawing, or at least reducing their exposure in the Gulf. One leading Reinsurer has recently informed its clients that it anticipates a 25% - 30% increase in hurricane activity, as compared with the existing (historic) models.

At the same time the Security Rating Agencies are suggesting that the financial model of specialist catastrophe Reinsurers is possibly flawed; or at least the capital required to support their writings should be such that the cost of their product will need to increase substantially.

This is coupled with an inevitable hardening of terms in the retrocession market (where Reinsurers themselves buy reinsurance protection). Either way, the cost of capital and the cost of retrocession is increasing.

The consequences of reduced capacity in the long-run, as well as increased rates, cannot be under-estimated with regard to their effect upon fragile Caribbean economies. Already many territories suffer a heavy insurance burden, to the extent that many (unfortunately usually the poorer) cannot afford hurricane cover. In the face of increased hurricane activity there will be significant economic and social consequences.

There are some voices in the market who say that the hurricane risk has become uninsurable. With the prospect of a USD 80 billion loss against a Reinsurance capital base of around USD 250 billion few would argue that it is not a serious point.

However, a significant aspect of the hurricane losses has been the exposure of a lack of control and discipline by insurers and reinsurers. Moreover a large portion of these losses arise from policies issued to Corporations with capital bases well in excess of their insurers; with a greater grasp of their own risk exposures than their insurers; obtaining coverage under loose policy forms that do not restrict recoveries to true indemnity: a sure recipe for disaster since prestige risks are usually accompanied by prestige losses. These should not detract from the legitimate risk transfer requirements of the majority of policyholders.

All depends on what happens in 2006. If there is a repeat of 2005 (or even of 2004) the capital markets may not be so accommodating; there may be other, more tempting opportunities, or they may simply feel that it is not worth ‘rolling the dice’ again. In which case Katrina may indeed turn out to be a defining moment.

Should 2006 be loss free, those still in the game will make a lot of money and the market will embark on yet another phase in the cycle. Yet one cannot begrudge the Insurers and Reinsurers who are stepping up to take on the risk in 2006. It is easy to overlook the startling fact that the Insurance Industry is there to pay out USD 80 billion of losses, and continues trading more or less normally. However, one cannot but help think that there are tough times ahead.

If this turns out to be the case, it is likely that the provision of insurance in Catastrophe-exposed areas will become an issue of broader economic and social concern.

Kind regards

 

Morley Speed

[ENDS]

-----Original Message-----
From: Intelligence Unit
Sent: 01 December 2005 18:10
To: ATCA Members
Subject: Response: Michael Wade; ATCA: 2005 Hurricane season ends; Lloyd's of London warns of potential loss; Payouts to exceed 9/11; Most records shattered; Huge uninsured losses

Dear ATCA Colleagues

We are grateful to Michael Wade for his views in regard to the 2005 Hurricane season and the implications for Lloyd's of London and the global insurance and reinsurance market.

Michael Wade is chief executive of the investment fund manager, The Rostrum Group, a specialist in the insurance & re-insurance sector. Mr Wade founded Holman Wade Lloyd’s insurance broking group in 1980; and later in 1993, CLM Insurance Fund plc – the first listed Lloyd’s capital provider. He served on the Council & Committee of Lloyd’s from 1988 to 1992 and on the Rowland Taskforce in 1991/1992, which set the strategy for Lloyd’s eventual reconstruction. He writes:

Dear DK

Thought provoking comments on the 2005 windstorms.

But one might add, if reviewing potential insured catastrophe exposures, the risk of earthquakes in both the West Coast region of the USA and Canada and also in Japan. Lloyd’s realistic disaster scenario (RDS) indicates potential insured losses of USD 54 billion in the case of the San Andreas fault; the New Madrid fault at somewhere exceeding USD 75 billion and Japan around USD 50 billion.

The insurance and reinsurance industry has a very real job to perform; and the possibility of reaching these sort of numbers is all too easy to predict under such an event. It is interesting to note that the Bermudian reinsurance market has raised over USD 12 billion in just a few weeks since the hurricanes; and in London the sums are less than GBP 1 bn – and, even then, much of the capital is being employed in Bermuda.

And perhaps one of the questions, for those of us in London, is whether the regulatory and tax regime are globally competitive and appropriate if we are to remain leaders in the international reinsurance business? Why is the business now more attracted to Bermuda and Switzerland ?

I would submit that the inability of reinsurers to reserve against pre-tax results for the long term against catastrophe exposure and the heavy hand of the FSA in regulating global wholesale business is severely damaging London’s prospects for the future. When will UK politicians wake up and respond to the need to permit long term reserving and get the FSA off our backs for wholesale business?

 

Michael Wade

[ENDS]

-----Original Message-----
From: Intelligence Unit
Sent: 30 November 2005 22:26
To: ATCA Members
Subject: ATCA: 2005 Hurricane season ends; Lloyd's of London warns of potential loss; Payouts to exceed 9/11; Most records shattered; Huge uninsured losses

Dear ATCA Colleagues

Lloyd's of London, the world's biggest insurance market, may post its first annual loss since 2001 after the costliest hurricane season on record triggered claims of about GBP 2.9 billion (USD 5 billion). "The chances of the market making a profit in 2005 are now small," Lloyd's said today in a statement.

Payouts by the over 300-year-old market, established in 1688 at Lloyd's coffee shop, will exceed claims from the September 11, 2001, terror attacks, which cost Lloyd's about USD 3.3 billion in its single biggest loss. Total insurance industry claims from the US hurricanes including Katrina, which damaged oil rigs, flooded New Orleans, and left hundreds dead in September, may reach USD 79 billion, according to Risk Management Solutions. Earlier this month, reinsurance giant Swiss Re estimated that the damage caused by the three hurricanes would cost the global insurance industry USD 60 billion in total.

Lloyd's today increased estimated net losses from Katrina to GBP 1.9 billion pounds, from GBP 1.4 billion. Hurricane Rita will probably cost GBP 535 million and claims from Wilma may reach GBP 483 million, according to the market.

The rating agencies are expected to revisit their credit outlooks, but this is unlikely to affect the market's ability to trade next year. Companies that trade at Lloyd's include units of Warren Buffett's Berkshire Hathaway and AIG, the world's largest insurer by market value. Insurers at Lloyd's, the world's sixth-biggest reinsurer, specialise in all types of risk.

Lloyd's expects to boost underwriting capacity, or the amount of business it can insure next year, by 7 percent to 14.7 billion pounds, the market said. Before the storms, capacity was forecast to decline 7 percent.

The busiest and costliest Atlantic hurricane season on record finally ends today - 30th November - but meteorologists say it may be years before the tropical Atlantic settles down. Even as the season comes to an end, tropical storm Epsilon is gaining power in the central Atlantic, the 26th named cyclone of a record-beating Atlantic hurricane season. Epsilon poses no threat to land at present. The last five named cyclones of the season have been named after letters in the Greek alphabet because the official list of storm names for 2005 has been exhausted.

At the start of the season, forecasters had warned that 2005 would be hyperactive because hurricanes feed on warm seas, and ocean temperatures in the tropical Atlantic region have warmed by 1 to 2 degrees Celsius. Key statistics for the 2005 Hurricane season, as measured over 150 years, are:

1. Most tropical storms = 26 in 2005 (so far). The old record was 21 storms, set in 1933;

2. Most hurricanes = 13 hurricanes, with top sustained winds of at least 119km/h. The old record was 12, set in 1969;

3. Category 5 hurricanes = three hurricanes - Katrina, Rita and Wilma - each reaching Category 5 status with sustained winds over 294km/h. Only 1960 and 1961 had more than one Category 5 storm previously;

4. Most powerful storm = Hurricane Wilma's briefly dropped to 882 millibars, the lowest ever in the Atlantic-Caribbean basin;

5. Costliest Hurricane Katrina caused at least US 80 billion of damage, making it the worst natural disaster ever to strike the United States. Hurricane Katrina thundered into the record books when it tragically submerged New Orleans and bulldozer damaged the Mississippi coast in late August. The monster storm killed at least 1,300 people, the most in the US since 1928. Previously 1992's Andrew was most costly, causing USD 26.5 billion of damage; and

6. Hurricane Stan was deadlier, killing up to 2,000 people with torrential rains that triggered mudslides and floods in Central America in October.

However, within all the record-breaking statistics of the season, what may remain hidden is the epic human impact with suffering writ large. US National Hurricane Centre director Max Mayfield has warned there are only six months to prepare for the next season, which could be just as bad.

The upper atmospheric winds that can shear off the tops of cyclones have been mostly absent for the past few years, so hurricanes that form are more likely to persist. Meteorologists said those conditions were part of naturally occurring cycles that alternately produce low-and high-activity periods, each lasting 20 to 30 years.

The current high-activity period began in 1995 and could last another decade or longer. Not only are there more and stronger storms, but wind patterns off Africa have steered more of them westward across the Atlantic and into the Caribbean and the Gulf of Mexico, increasing the number that hit land this year.

The US weather agencies have asked Congress for a USD 50 million funding increase next year to pay for additional research flights into storms to improve forecast techniques. Although they have improved in the last 15 years at forecasting where a storm will go, they are often defeated in their attempts to predict how strong it will be when it gets there. Coastal residents often ignore evacuation orders if they expect a weak hurricane, which leaves them vulnerable if it intensifies rapidly near shore. And if a strong storm fizzles near shore, those who flee inland to escape it may be tempted to ignore evacuation orders next time. The agencies almost always overforecast on rapid development and underforecast on rapid weakening.

[ENDS]

We look forward to your further thoughts, observations and views. Thank you.

Best wishes

 

For and on behalf of DK Matai, Chairman, Asymmetric Threats Contingency Alliance (ATCA)

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