As we went to press hurricane Charley had dissipated its force en route to New England but the storm left a trail of damage as it travelled diagonally across Florida Preliminary estimates of insured d

Coming at the start of the hurricane season, Charley is a salutary reminder of the randomness and power of such events. At its peak, Charley was a category 4 hurricane with winds exceeding 145 miles per hour, making it one of the strongest storms to hit the United States since 1992.

That the first six months of 2004 were comparatively benign in terms of natural catastrophes is no indication that the rest of the year will remain so. Indeed, all forecasters of US hurricanes say numbers of storms this year are again likely to be above the historical average.

The combination of this relatively low level of catastrophe losses in the first half of 2004, good underwriting results achieved in 2003 and predicted for 2004, and increased interest rates is clearly beginning to make the insurance industry and its shareholders nervous that the rate cutting that has already begun could accelerate.

The price of insurance stocks rose on the New York Stock Exchange immediately following hurricane Charley, as the market hopes that the losses from the storm will pull insurers back from the brink. It is unlikely to have been a large enough loss, but it did come early in the hurricane season, and a further big storm or storms could make a difference.

The Monte Carlo Rendez-vous in September and reinsurers' October meeting at Baden-Baden in Germany should give an indication of the extent to which the market is softening, although widening conditions are less evident but can also be a material factor.

When it comes to property catastrophe risks, the existing underwriters have invested substantially in catastrophe risk management and would find it difficult to defend ill considered pricing decisions to investors.

Nor will investors and regulators accept a little dabbling in the higher excess layers on catastrophe programmes by non-specialists just because there appeared to be arbitrage opportunities.

This does not mean that catastrophe models give precise answers, that all models for all territories are equally robust or that underwriters cannot make genuine mistakes in balancing the multiple relationships across capital and underwriting. Painful losses can still occur, and the trend in loss severity continues upward.

There is now widespread belief among the insurance and reinsurance community that climate change is occurring and that it holds considerable dangers in the form of greater and more frequent extremes of weather. It may be difficult to estimate to what extent increased concentrations of assets in vulnerable areas or more hazardous weather patterns are responsible for the cost of natural catastrophe events, but the evidence indicates they will continue to climb.

An important question when it comes to catastrophes is - how large is large? The World Trade Center loss has shown clearly that at a certain size of disaster, the impact spreads to other, less obvious other classes of cover, such as personal accident, art or goods in transit. As a result, insurers and reinsurers who thought they had an acceptable level of exposure to earthquake or windstorm may find that they have suffered a damaging accumulation of claims.

Even if technical analysis and awareness of peak exposures now limit extremes of competition in pricing of property risks in the developed world, volatile swings in pricing and capacity may not have come to an end.

Underwriting may be less technical in developing markets where modelling is less precise and insurers and reinsurers are looking to establish themselves.

China's booming economy must be exposing some businesses to major direct or indirect losses from natural or man made catastrophes. Outsourced call centres or data processing in hazard prone places could be an unexpected source of large business interruption claims, even if the physical damage is modest.

In any case, catastrophe risks are only a small proportion of even most reinsurers' books, and competition soon returns to almost every line of business once profits are reported. It does appear sometimes that by the time an insurer is ready to enter a new class of business or a new territory, the existing players are already cutting prices. The new entrant adds further competition and so fuels the downward rush of rates.

The losses made by insurers and reinsurers angered their shareholders.

Swinging price increases and contraction in coverage and limits angered their customers. Perhaps the market has changed, and greater concentration and regulation will produce greater stability. It is hard to believe that the industry cannot do better by either its shareholders or its policyholders than it has done.

Finally, a short note to follow on my comment in the last issue about wanting a GPS system to make my XDAII phone/handheld computer a useful catastrophe risk management device - one is, of course, now available.