With negotiations for the year-end renewals about to start in earnest, will the recent spate of natural catastrophes have any impact on prices or conditions? By Sarah Goddard.

There were a few well-known faces missing from this year's Rendez-Vous de Septembre. It wasn't a case of another round of M&A activity that stopped some from attending; instead it was the fact that they had been marooned on their home island of Bermuda. In the small hours of the Saturday prior to the start of the Rendez-Vous, the category 3 Hurricane Fabian ripped through Bermuda, uprooting trees and tossing them around like matchsticks, unpeeling roofs as if they were banana skins, and blowing boats onto land - and in some cases into houses. Several hotels sustained widespread damage, including the Southampton Princess, which will not reopen until next Spring at the earliest. In addition, the causeway between the west of the island (where the capital, Hamilton, is located) and the airport was badly damaged in two places, and four people died trying to traverse it. This damage, and the presence of boulders on the runway, restricted flights, and no commercial planes left the island for several days.

Concern for Bermudians

For those Bermuda-based re/insurers already gathered in Monte Carlo for the Rendez-Vous, the immediate concern was for family and friends, though conversation inevitably turned to possible loss levels. Figures estimating claims up to $1bn were soon circulating, though recent calculations from domestic insurer BF&M are falling closer to $140m. This does not, however, include claims on international policies; with the Hamilton Princess still operating on a 75% occupancy rate because of damage to a significant amount of its property, and the previously mentioned devastation to the Southampton Princess, which needs a new roof as well as a couple of replacement floors, owner Fairmont's international property policy will be taking a battering. Nevertheless, the more modest total loss estimate now circulating of $350m appears closer to the mark.

Of course, the increase in re/insurance capacity based in Hamilton over the past two years was also exercising people's minds as Fabian passed over the island. What would happen if Hamilton's electricity and telecommunications systems were knocked out, from a business perspective? In fact, although the east of the island was left without power and telecoms for a number of days - and some households for more than a week - Hamilton's infrastucture, buried underground as it is, weathered the storm without damage. Even so, the possibility of losing one of the largest international re/insurance centres because of windstorm exposure has been thrown into sharp relief by Fabian.

Typhoon torment

Hot on the heels of Fabian was typhoon Maemi, which tore through South Korea the following weekend. More than 100 people were killed, and the widespread damage included collapsed buildings, landslides, widespread flooding, trains derailed and even a cruise ship tossed onto a beach. Local reports said that 18 vessels and 13 container cranes had been destroyed by the storm, and economic losses were reaching $6bn. Maemi was one of the most powerful typhoons to hit South Korea, and insured losses are currently estimated at around $420m.

But before the Korean clean-up could start in earnest, another storm was blowing up, this time back in the Atlantic. As Isabel developed, the signs were that something big was going to happen. Some commentators were suggesting Isabel could end up being larger than 1992's Hurricane Andrew, which resulted in insured losses of £20bn (in 2003 terms) and proved the catalyst for the formation of Bermuda's cat packers. In the early stages a category 5 hurricane with a path that looked like the direction of most disaster for the US, Isabel made headline news around the world, as everyone watched and waited to see where she would hit, with what intensity. "Isabel was much talked about because of the potential," said Warren Neale, regional director and global property product leader at Willis Re. "On 17 September, Isabel had the potential to be another Andrew," and insurance stocks tumbled at the news. In fact, by the time she made landfall at Cape Hatteras in the Carolinas, Isabel had been downgraded to a category 2 hurricane, blowing at 85knots maximum sustained wind, and her path had altered to one of less destruction. Nevertheless, Isabel carved a new inlet at Hatteras Island as she hit land, and caused the Federal Government in Washington, DC to shut for two days. As well as property damage, storm surge and flooding have been severe, though recent estimates from modeling agencies AIR Worldwide and RMS both suggest that insured losses will be less than $1bn. Economic losses are likely to be much higher, however, and several states hit by Isabel were still in clean-up mode at the end of September, let alone anywhere near assessing the total loss figures. A spokesman for the state insurance department in Washington, DC expected losses in the area to run into the tens of millions of dollars, with power cuts in particular affecting retail businesses. Not far short of 2 million households in Virginia and North Carolina, customers of Dominion Power, lost electricity - the largest outage in the history of the company. Much of the damage to households from flooding will be picked up by the Federal flood program rather than the commercial insurance markets.

With Isabel-related insured losses seeming to find a level around the $1bn mark, it is unlikely that there will be any substantial impact on the reinsurance sector. "My view is that while these events are notable, they are not instances liable to change the marketplace," said Willis Re's Mr Neale. Henry Keeling, CEO of XL Re agreed. "Clearly Maemi looks like a significant event for Korea, and Fabian for the Bermuda market, but none of these are big enough to trouble the market on a global scale," he said. And Jonathan Isherwood, Global Property Leader with GE Frankona Re, commented that the concentration of events over the past few weeks may have led people to sit back and think more closelly about the exposures they are facing. "It refocuses attention," he said.

What they have done, however, is draw attention to the fact that natural catastrophes are always around, and when and where they hit is fairly unpredictable.

Prediction pronouncements

But only `fairly' unpredictable. Speaking just after Fabian hit Bermuda, Professor Bill McGuire of the Benfield Hazard Research Centre, University of London, said that he was happy that his prediction of 2.4 Atlantic storms making landfall this season still held. Storm prediction guru, Professor William Gray of the Department of Atmospheric Science at the University of Colorado, had predicted slightly above average storm activity for September, comprising four named storms, two hurricanes and one major hurricane, a pattern very similar to what he is predicting for October.

Again, it is not just the number of storms that count, but where they hit. According to XL's Mr Keeling, both Fabian and Isabel stayed fairly true to the track predicted by modeling agencies, and he added that in previous years, some particularly stormy seasons had been of little consequence for the re/insurance sector since none of the systems had made landfall in the US.

Despite the reminder the industry has received about the continued possibility of natural catastrophes, from Mr Keeling's point of view, professional property cat underwriters are continually aware of this fact. And everyone agrees that there will be no direct impact on rates, since there are no unexpected losses.

Where rates may be impacted, however, is the new modeling system introduced earlier this year by RMS, according to Paddy Jago, CEO, North America of Aon Re, based in London. "RMS version 4.3 is going to have more impact, because it is causing insurers and reinsurers to look again at return periods on their portfolios," he said.

Another pressure on rates could be the changes in rules governing qualifying quota shares from Lloyd's syndicates, commented Mr Isherwood. With a fair stack of Lloyd's 2003 capacity effectively being provided by the new Bermudians through QQSs, a decision made recently by Lloyd's to restrict the amount a QQS can provide to 10% (down from 30%) may mean that certain capacity may be looking for new opportunities. And with negotiations for year-end renewals about to go up a gear at Baden Baden, it may require a stalwart constitution to keep the market at its current level.

Sarah Goddard is the editor of Global Reinsurance.