Analysts expect $40 billion-plus storms to become more common, and many within the industry expect a $100 billion CAT year in the not too distant future. Pricing and underwriting discipline also remain a key issue. The III notes that regulators, especially in catastrophe-prone areas, are reluctant to allow insurers to charge risk-based rates. Most insurers are also paying more for reinsurance, which causes them to report lower “net” written premium growth figures if they cannot fully recoup those costs at the retail level. Increased interest by traditional commercial insurance buyers in alternative forms of risk transfer, especially captives, self-insurance arrangements and large deductibles, is causing significant leakage of premiums from the system. Also, insurer pullbacks from coastal areas are resulting in the ceding of significant premiums to state-run residual market mechanisms, often in states that otherwise offer significant growth opportunities.

High on the list of external threats are adverse court decisions in Mississippi and Louisiana. The suits threaten insurers’ ability to operate in coastal sections of these states. Regulatory and legislative risks also loom large in 2007. Florida’s governor imposed a freeze on all rate changes and non-renewals, potentially leaving insurers exposed to excessive catastrophe losses and ratings downgrades. Separately, some states are attacking the right of insurers to use certain underwriting criteria, despite the fact that such criteria are accurate predictors of future loss and result in a rating system that is more equitable for all policyholders.

Among other major external risks, terrorism remains a key concern, despite the two-year extension of the Terrorism Risk Insurance Act signed by President Bush in late 2005. The extension, which has a new expiration date of December 31, 2007, pushed considerably more risk onto private insurers.

Source: server.iii.org