Catlin CEO Stephen Catlin says global reinsurance and insurance rates should be increased in a “measured” way over the next six months in order to avoid a kneejerk reaction in the market.

Mr Catlin told insuranceNEWS.com.au that rises in “the order of 10-25%, depending on the class of business” should be sufficient as the 2011 catastrophes have affected earnings rather than the capital of insurers and reinsurers.

Catlin is the largest underwriter in the Lloyd’s market with an 18.5% market share, and also operates across the globe from hubs in Europe, Bermuda, Asia-Pacific and Canada.

Mr Catlin, who was visiting Australia to speak at the Steadfast Convention in Melbourne, says that with total industry losses for 2011 sitting at between $US50 billion and $US70 billion ($48 billion to $67 billion), it is unrealistic for brokers to expect no change in rates.

“To suggest that’s not market-turning is a bit strange,” Mr Catlin says, adding that last year many in the industry were saying $US50 billion ($48 billion) in losses would be enough to drive up rates. 

He says an over-reaction – which he defines as rate increases in the order of 50% such as those witnessed after the September 11 attacks – would be bad for both clients and the industry. In that case rates would spike before falling in a couple of years.

Mr Catlin says pricing in Australia and New Zealand has been “very low” in recent years. While rates in the catastrophe-affected regions will logically rise, because the same capital pool is used to fund catastrophe risk globally, it is inevitable that increases will be global.

Price increases will also flow through to the casualty market, as pricing in certain classes of casualty business is “increasingly unsustainable”.

He says casualty rates are on par with 1999, which was “the worst underwriting year I can remember”.

“There is an air of inevitability that sometime there has to be a price correction [in the casualty market] as well,” he said.

Mr Catlin says the low interest rate environment further strengthens the case for rate increases because investment income will not provide the earnings buffer it has in recent years.

He predicts 2011 will be the “worst” year in recent times as far as investment returns are concerned.

But if the looming US hurricane season provides further major catastrophes, all bets would be off.

“If there is another $US25 billion ($24 billion) worth of cat losses this year there will be a kneejerk reaction,” he told insuranceNEWS.com.au.

This is because a further hit of that magnitude would affect capital holdings across the industry.

Mr Catlin says while links between the recent earthquakes in Chile, New Zealand and Japan are yet to be established, each country sits on the so-called Ring of Fire, a volatile earthquake zone with also runs under the west coast of the US.

He says fears are growing about the possibility of a correlation in the recent earthquake activity and, therefore, about the potential for an earthquake in California.

He says many businesses will be reassessing their earthquake and tsunami-related property/catastrophe exposures for the US west coast, and rates in that area are “bound to rise”.