Allocating 2007 hurricane losses: primary insurers or reinsurers?

Climactic conditions are ripe for an active storm season and obviously an active storm season increases the likelihood that the insurance industry will incur losses, according to a June 2007 report by Fitch Ratings, entitled Hurricane Season 2007: A Desk Reference for Insurance Investors. As a general rule, Fitch believes primary insurers will disproportionately incur losses relative to reinsurers if the season is one of several small to moderate storms such as was the case in 2004, the report says. It goes on to note the way the losses are allocated between the insurance companies and the reinsurance companies is based on the type of storm, the number of storms and the affected area and size. But if the 2007 season is like more like 2005, in which there were large and very large events, then Fitch believes the burden of losses tends to shift to reinsurers.Fitch notes its generalizations assume the proportion of quota share and excess of loss reinsurance sold to the market is constant, although this is not the case. Pricing does affect the purchase of quota share and excess of loss insurance.Reinsurance pricing peaked in 2006 and primary insurance pricing in areas exposed to hurricanes has remained relatively strong, according to the report. As a result, Fitch expects there to be a subtle shift towards relatively more quota share reinsurance in 2007. All else equal, this would tend to increase the reinsurers exposure to multiple storms.