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Despite few U.S. catastrophes last year, fear is a major reason why public entity risk managers, among others, in catastrophe-prone areas are still paying higher prices for their property cat coverage.
Insurers are still worried about what this year's hurricane season may bring, say observers, who point to predictions of more hurricanes this year after a benign 2006.
The Arlington, Va.-based National Oceanic and Atmospheric Administration said there is a 75% chance that this year's hurricane season will be more active than normal.
The Tropical Meteorology Project at Colorado State University at Fort Collins has predicted 17 named storms would form, of which nine would become hurricanes with five becoming intense hurricanes.
"After a couple of heavy storm years, insurers are being more conservative" in how they underwrite the risk, said Adam Klauber, director of equity research for Cochran Caronia Waller Securities L.L.C., a Chicago-based insurance industry banking firm.
Mark Lane, an analyst with William Blair & Co. in Chicago, said, "The thought process is, one soft year is not enough to change a broader underlying trend, and I would agree with that."
"It'll be a surprise to everybody if there's not a big event this year," said Diane Coogan-Pushner, a portfolio manager with Philo Smith & Co., a Stamford, Conn.-based investment banking firm.
In addition, said Mr. Lane, "You had significant losses in 2004 and record losses in 2005."
Another possible reason behind the higher prices is tougher risk-based capital formulas and stress testing from insurer rating agencies and revised catastrophe models, which discourage rate cuts.
Subsequently, "the property catastrophe modeling consulting firms, and also the rating agencies, both increased their frequency (and) severity loss projections, which put pressure on capital and required companies to hold more capital support for catastrophe risk," Mr. Lane said. As a result, "companies increased pricing."