Superstorm Sandy showed up the limitations of catastrophe models used by the insurance industry — and it will be some time before the full extent of insured losses is known.That was the view of top insurance executives, expressed in a panel discussion on the second day of the PWC / Standard & Poor’s Bermuda (Re) insurance Conference at the Fairmont Hamilton Princess yesterday.Estimates of losses from the storm, which caused wind and flood damage across a huge area of the US East Coast, vary widely and most are for $20 billion or more. The damage and resulting power losses caused many businesses to close down, particularly in New Jersey and New York.Marty Becker, CEO of Bermuda insurer and reinsurer Alterra Capital Holdings Ltd, said: “Sandy has once again proved that contingent business interruption is very difficult to model. Today, we sit here two weeks out and we can’t seem to get consensus within $5 billion.“It’s probably going to unfold slowly, there may be some political influences on what we originally thought the impact was. We will learn from Sandy and it will cost us money. It has shown once again that models are great, but they’re not everything.”Fellow panellist Joseph Brandon, executive vice-president of US re/insurer Alleghany Corporation, shared that view and added that Sandy would lead to reassessment of the nature of risk exposures.“Fifteen days later, there’s a lot of uncertainty about the industry loss and people are still rounding to the nearest $5 billion,” Mr Brandon said. “So one may ask that if 15 days after the event you don’t know what the loss was, then how did you underwrite it before the loss? I think that uncertainty will cause direct insurers, reinsurers and retrocessionaires to ask a lot of questions about their coastal flooding simulations.”RenaissanceRe CEO Neill Currie had some concerns about the political influence on losses, exercised through state regulators declaring that substantial hurricane deductibles present in many policies, would not apply in the case of Sandy.“Some of the political rhetoric we’ve heard is that ‘we’re not going to let those insurance companies enforce those windstorm deductibles,” Mr Currie said. “But it’s in the contract. So this may set a dangerous precedent.”Mr Brandon said this could have unintended consequences in the form of pricing adjustments, if insurers believed that deductibles detailed in policies could be overridden.“For every action, there tends to be an equal and opposite reaction. If regulators are going to step in and say, ‘Hurricane deductibles don’t apply’, I think that people who write primary policies on the coast are really going to look at their wordings,” Mr Brandon said.Mr Becker said Sandy might alter the outlook for property-catastrophe reinsurance rates for the upcoming January 1 renewals.“The conventional wisdom, pre-Sandy, was that January 1 rates would soften a bit, five percent or maybe even 10 percent,” Mr Becker said.“I think it’s too early to say how much Sandy will change conventional wisdom, but I think it’s probably unlikely that there will be material softening, even though there’s been a material increase in supply with the alternative capital that’s rushed to the Island during 2012 that certainly makes some categories more competitive.“But the current thinking at our shop is that 1/1 will look a lot like 1/1 last year, which was, quite frankly, pretty good pricing.”The subject of the influx of “alternative capital” — including catastrophe bonds, insurance-linked securities and sidecars, which give investors the opportunity for fixed-term reinsurance exposure — was also discussed, and particularly how much it could be relied on.Mr Currie saw two particular issues. “When interest rates go back up, will these guys still love reinsurance so much?” he said. “And two, when they have a loss, will they love it as much they do now?”Mr Becker said there were question marks over how “sticky” the capital would be. He added that insurance-linked investments were becoming attractive to a wider investor base, extending from hedge funds to pension funds.“Reinsurance now seems to be an accepted asset class for these funds,” Mr Becker said. “It might only be half a percent or one percent of their assets, but we’re talking billions of dollars.“There is an order of magnitude issue here, how much can we absorb without distorting the marketplace. I would be very cautious as a cedant to become reliant upon that type of reinsurance because there’s no relationship, it’s purely a financial play and it’s here today, but if a better alternative comes up, then tomorrow it’s going to be gone.“It’s a little bit like a drug. You don’t want to get hooked on it, because it’s going to disappear at some point.”