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Reinsurers hit by three Hurricane Katrina-sized events: Analysis

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The recent string of catastrophe losses that hit the reinsurance market and changes in catastrophe modeling add up to the equivalent of three Hurricane Katrina-size events for some property reinsurers, according to a report by reinsurance broker Holborn Corp.

The losses and model changes already have led to tighter capacity in some areas of the market, though their ultimate effect on pricing will still likely depend on the extent of losses from the current wind season and other factors, the New York-based intermediary said in the report issued Friday.

The report, The Mid-Year 2011 Reinsurance Market: On Uncertain Ground, notes that as recently as 2009, Holborn and others reported that the reinsurance industry had $60 billion in excess in capital, equivalent to three times the $20 billion net reinsurance loss caused by Katrina, the last major catastrophe to cause a shift in pricing.

However, the March earthquake and tsunami in Japan cost reinsurers the equivalent of one Katrina-size loss plus there have been an “equivalent-sized adverse combination of other losses,” such as the New Zealand earthquake, that have hit reinsurers, according to Holborn.

Model changes

For U.S. coastal property exposures, the report also cited recent catastrophe model changes as causing reinsurers to assign more capital to some exposures. The report also noted that the United States suffered heavy tornado losses this year.

“Thus, for some property business, the market’s capital has in fact felt ‘three Katrinas’ and begun to move, although with capacity tightening rather than pricing,” Holborn said in the report.

The year-end pricing environment will depend on experience in the coming wind season and other factors. That means the market is likely to differ across lines of business and regions, Holborn said.

The report came a day after London-based Willis Group Holdings P.L.C.’s Willis Re unit issued a report saying that some reinsurers were positioning themselves for rate hikes in the wake of catastrophe losses.

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