Reinsurance Costs Could Rise

Reinsurance companies including Munich Re and Swiss Reinsurance Co., the world’s largest, may raise premium rates “across the board” after Hurricane Katrina, insurance ratings firm A.M. Best said.

“Katrina has made the prospect for an uplift in reinsurance rates more realistic,” A.M. Best senior analyst Miles Trotter said Sunday in Monte Carlo. “Losses for Katrina are ballooning by the day.”

Reinsurers and their customers, including insurers Allianz and Axa, begin negotiating 2006 contracts when they meet in Monte Carlo this week.

Katrina dislodged offshore oil rigs, flattened homes, flooded New Orleans, left hundreds dead and brought commerce on the U.S. Gulf Coast to a standstill when it battered four states on Aug. 29. The storm may be the costliest ever, according to estimates from analysts including Risk Management Solutions, which anticipates insured losses of as much as $60 billion.

The ratings of reinsurers with “significant” losses from Katrina may be lowered, Trotter said.

Reinsurance prices rose for three years after the Sept. 11, 2001, attacks as companies sought to replenish reserves depleted by claims and falling stock markets.

Prices for property coverage jumped by as much as 20% in Florida after hurricanes Charlie, Frances, Ivan and Jeanne struck the state in 2004, Fitch Ratings said. The storms caused $22.9 billion in insured losses, according to Insurance Services Office Inc.

Rates in other lines of business, such as aviation and professional liability, have been falling for more than a year. Overall, reinsurance rates fell 1% in January, contrasted with a 4.5% increase the previous year and an 11% jump in 2003, according to a report from Fitch Ratings last week.

Reinsurers take on a portion of the risks that insurers assume for clients, in exchange for premium payments.

Credit rating firms Standard & Poor’s and Moody’s Investors Service said Sunday that their outlooks for the global reinsurance industry were stable despite Hurricane Katrina.

However, both companies said there were still areas of concern for reinsurers, such as weakness of reserves and a possible major fall in earnings due to the effects of the hurricane.

“Despite the scale of Hurricane Katrina, its impact on ratings is expected to be confined to a handful of reinsurers. This is due to the strength of reinsurers’ underlying operating performance and balance sheets,” Standard & Poor’s analyst Simon Marshall said Sunday in Monte Carlo.

S&P; said its view was based on a Katrina market loss of as much as $50 billion and on information provided by the companies.

Moody’s issued a similar statement.

“Moody’s has maintained its stable rating outlook on the global reinsurance industry, based on a favorable pricing environment and strong profits in recent years, particularly in [the] property business,” it said.

Moody’s analyst Timour Boudkeev said the reinsurance industry showed good diversification across business segments, geographies and products, along with better risk management policies than in the past.

Yet some analysts fear that reinsurers may be forced to raise new capital if claims from Katrina damage their balance sheets.

Moody’s said it had concerns about reinsurers’ reserve adequacy, and S&P; said that, for some companies, Katrina could wipe out a whole year’s earnings.