establish<sup>33</sup> . Although beyond the scope of this paper, it is worthwhile to mention a possible strategy to prove or disprove the APH using some of the techniques of this paper. If one were to compare the LECs for US hurricane across all modeling companies and across all years going back to, say, 1999, it might be possible to see eventually, perhaps by 2016 (ten years after CC models were introduced) that property density growth alone will explain most model changes and that CC models eventually become indistinguishable from a BN model from 1999 trended up every year for property density growth. This would provide a hint that the APH is true. Depending on the actual LEC development versus the property density increase trend, CC models in 2006 might in retrospect be seen as either (i) a convenient way either to catch up on property density growth revealed by the active 2004 and 2005 US hurricane seasons or (ii) a way to get ahead of property density growth increases in the near future.

# **8.  US reinsurance markets and the potential effect on developing countries**

What happens in the US reinsurance market (USRM) often affects reinsurance markets abroad, so here we will discuss the USRM. The USRM, like the US insurance market, is the largest in the world34; it is estimated that North America (and mainly the USA) absorb 75% of the worldwide catastrophe reinsurance capacity (Cummins and Mahul 2009). Currently, the USRM is experiencing important challenges. Demand for reinsurance coverage is going up, while the ability of the USRM to provide coverage is going down. Models have some part in this. If modeled risk increases, as they have with the transition to CC models, both the insurer and reinsurer need to raise more capital or shed risk. Loss events often harm insurer and reinsurer differently, but model change events affect both in the same way. This year, this awkward dynamic is exacerbated by a potential change in the way rating agencies view the capital adequacy of insures and reinsurers. As of this year, the Florida Hurricane Catastrophe Fund (FHCF), the largest provider of hurricane reinsurance in the world, is considered substantially hampered in its ability to meet its potential obligations. This is because coming into this year the FHCF has relied upon tens of billions of USD in contingent, post-disaster financing to cover losses to the FHCF should the Big One occur. The recent impairment of the credit markets makes such a massive, post-event financing of losses unfeasible. This has caused a 10 to 30 billion USD gap in hurricane reinsurance, which cannot be easily filled. Furthermore, similar to the state of Florida, the rest of the reinsurance and insurance industry had been relying, at least in part, on post-event financing. Before the credit crisis, rating agencies expected that even substantial shortfalls in capital caused by a loss event could be healed over by the rapid mobilization of capital into the reinsurance and insurance markets after a large loss event—as had been the case in the past after Hurricane Andrew, the Northridge Earthquake, the terrorists attacks on 9/11, and Hurricane Katrina. Now, the outlook on post-event capital mobility and formation is uncertain.

We are still watching the situation unfold, but it appears inevitable that USRM premiums are set to dramatically increase in 2009-2010. Unlike increases driven by a loss event, these premium increases are likely to be slower to wash out of the system becuase they are driven by underlying structural trends and not by a single, rare event of loss.

> 33 Transcripts of private conversations are sometimes used to establish that a transaction has been manipulated, but even this form of evidence is not without its issues. One of the authors (JS) has observed that traders will sometimes confess to rigging a price when they in fact did not. Ultimately, expressing only the desire, not the true ability, to gain an edge in a highly competitive market, a trader’s confession is often a lie about a lie.

> 34 Swiss Re website. See in particular the research and publications of Swiss Re’s sigma group. www.swissre.com

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