Katrina spurs risk modelling rethink across US insurance sector

Measurement

That was the conclusion of witnesses who appeared before the House Financial Services Subcommittee on Capital markets, insurance and government sponsored enterprises to testify at a hearing on Stabilising insurance markets for coastal consumers, in September.

"A true mega-catastrophe striking a heavily populated area could potentially exceed private [insurance] market capacity. Therefore, it is appropriate for policymakers to study whether government programmes should be created to assist policyholders and insurance companies to prevent and prepare for such mega events in those regions that are particularly vulnerable," said Charles Chamness, president of the National Association of Mutual Insurance Companies.

In addition to calls on the government for assistance, regional supervisors also revealed that sharp price increases in property insurance.

"Insurance costs are not going up to directly recoup the losses of 2004 and 2005. They are going up because the losses of 2004 and 2005 have demonstrated a level of risk potential for the future that has insurers rethinking what their prospective losses will be going forward," said Kevin McCarty, insurance commissioner for the state of Florida.

"When an insurer suffers a 1-in-500 year event in consecutive years, it rightly begins to question the validity of its models and risk management assumptions, and adjust its future expected losses accordingly," he added.

Franklin Nutter, president of the Reinsurance Association of America said: "Modellers revised their models following the 2005 hurricane season due to new data and the belief that we are entering an era of increased hurricane frequency and severity. Reports are that Florida catastrophe models increased 60% for frequency and 40% for severity with Gulf Coast models revised for a 20% increase in frequency and 15% for severity.".

"Yet despite the losses of 2004 and 2005, private market reinsurance capacity increased in 2006. OR&C