Will string of startups truly benefit buyers?

Almost as if on cue, major catastrophe losses again have triggered interest in startup companies. We can't help but wonder, though, whether this will truly benefit insurance buyers.

In the past eight weeks, insurers and reinsurers have raised more than $5 billion in capital, largely in response to losses from Hurricanes Katrina and Rita. Wilma, according to the latest loss estimates of up to $12 billion, could well enter the record books as the third-costliest insured windstorm in history. As we report on page 1, several new companies are forming in Bermuda, and we hear that more are in the works.

Bermuda's record of attracting new companies and capital is impressive. After the Sept. 11, 2001, terrorist attacks, $25 billion of capital entered Bermuda, creating a string of successful insurers and reinsurers dubbed the "Class of 2001." Similarly, investments after Hurricane Andrew in 1992 launched a group of new property catastrophe reinsurers.

After the string of big losses this year, new capital is clearly needed. At the low end of recent estimates, Katrina, Rita and Wilma by themselves will cost insurers at least $44 billion and possibly much more.

The Class of 2001 proved that money can be made, but those startups also faced the twin blessings of hard market conditions and a relatively benign loss environment that lasted for four years. We think the current market outlook is not as favorable, and insurers generally have an abysmal record of underwriting losses. In fact, 2004 marked the first time in 26 years that U.S. property/casualty companies made an underwriting profit.

Katrina's description as "a market-changing event" has almost become a mantra, but it's not clear whether that applies across most lines. So far, rate decreases are still happening on casualty business.

Our fear is that opportunistic capital will add undue competitive pressure and then withdraw, increasing volatility in the market.

Risk managers have a hard enough time trying to explain and budget for market cycles. We hope that capital enters the industry to replace what was lost, not to naively chase high returns and exit when those don't materialize.