Filed Under:Claims, Catastrophe & Restoration

Who Pays for National Catastrophes?

Although insurance capacity for catastrophic perils is still available and affordable, some experts say last year’s huge losses already are driving up insurance costs and could shrink capacity, federal financial assistance or both.

When John Fogerty musically asked "Who’ll Stop the Rain?" 40 years ago, he was pondering the world’s disquiet. But given the economic and insured damage from natural catastrophes that deluged the U.S. and the rest of the world in 2011, the question today is relevant and literal.

Property owners would welcome a reprieve from rain—as well as wind, earthquakes, tsunamis and terrorism risks. But the next-best thing to a futuristic weather-control machine and world peace is the assurance that property owners can continue to count on commercial insurers and public funds for assistance in covering the cost of catastrophe losses.

U.S. catastrophe losses in 2011 approached record levels, too, according to Munich Re. U.S. economic damages hit about $75 billion, $35 billion of which was insured. These included:

  • With 552 fatalities, 2011 was the deadliest year for tornadoes since 1925, and April marked the most active month ever with 748 observed twisters.
  • Thunderstorms caused $25.8 billion of insured damage, with two separate storm systems each causing at least $6 billion of insured losses. Since 1980, annual insured losses, adjusted for inflation, have grown from less than $2.5 billion to more than $8 billion in six of the past 10 years.
  • The lower Mississippi River flooding was the worst since 1927, causing $2 billion of economic damage and $500 million of insured damage.
  • With more than 8 million acres consumed, 2011 was the fourth-worst year for wildfires since 1980.
  • Insured losses from winter storms continued to drift higher, hitting $2 billion last year, or nearly double the average losses during the early 1980s.

The losses had a notable financial impact on U.S. insurers. In December, A.M. Best reported that net income for U.S. property/casualty insurers fell 61 percent during the first 9 months of 2011 compared with the industry’s performance for the same period in 2010.

2012 impact

So what do last year’s losses mean this year for U.S. insurance buyers with catastrophe-exposed property?

FEMA aid questions

Federal financial assistance in the wake of a catastrophe is not as sure a thing for public entities.

In January, FEMA’s press office denied that two formulas ever existed. It also would not directly answer other questions on the issue but instead referred to FEMA documents that public entity risk managers have said are unclear. FEMA also would not make Walke or his successor available for comment.

"There’s a lot of confusion about how FEMA does the things that they do," said Dan Hurley, president-elect of the Public Risk Management Assn. and senior director, risk management and safety for public schools in Norfolk, Va.

But the industry’s retention would be substantial. The industry’s aggregate retention must total $27.5 billion; individually, each insurer would be subject to a deductible of 20 percent of its gross written premiums for its commercial property-casualty insurance book of business. In addition, insurers are subject to a 15 percent co-insurance requirement.

The coverage can be expensive in cities and for risks considered prime terrorism targets, and rates rise as an insurer’s terrorism capacity shrinks, said Wendy Peters, a Radnor, Tenn.-based senior vice president in the terrorism practices group at Willis North America. But insurers will "throw in" terrorism coverage "for a relatively low cost" for what they consider low-risk clients outside of major cities, she said.

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