'04 Could Have Second Highest CAT Loss Tally

'04 Could Have Second Highest CAT Loss Tally

By Mark E. Ruquet

NU Online News Service, Sept. 15, 2:22 p.m. EDT?With Hurricane Ivan moving toward the Gulf Coast and Tropical Storm Jeanne making rumblings in the Atlantic near Puerto Rico, 2004 is on track to become the second most expensive insured natural catastrophe loss year on record, said an industry expert.[@@]

"2004 is most likely to be the second most expensive year in terms of natural catastrophe losses," said Robert P. Hartwig, vice president and chief economist for the Insurance Information Institute Inc. "But the insurance industry is better able to withstand these losses without concern of carrier solvency throughout the industry."

Mr. Hartwig said that with the losses from two major hurricanes on record already, and the peak of the hurricane season almost here, he projected that a little more than $4 billion in losses would put 2004 over the top. He said with losses this year from Charley and Frances estimated to be around $13.5 billion, 2004 is already the third most expensive on record.

This storm season could easily exceed the $16.9 billion (in 2004 dollars) in insured catastrophe losses in 1994, the year the Northridge earthquake struck California.

The most expensive year in insured natural catastrophe losses on record is 1992, when Hurricanes Andrew and Iniki struck causing close to $23 billion in losses in today's dollars.

Mr. Hartwig said that Ivan would be one of the worst to strike that section of the Gulf Coast between Louisiana and Florida since Hurricane Camille in 1969. That storm was a category five hurricane causing $1.1 billion (in today's dollars) in insured catastrophe losses.

In the 35 years since Camille, there has been substantial development and population growth along the coast, along with increased insurance penetration, he noted. A storm of Ivan's force, a category four with winds approaching 140 mph, extending more than 200 miles from its center, would reap substantially more damage today, he said.

However, Mr. Hartwig does not believe the industry will be seriously affected by the losses.

"There is not enough [losses] to force an end to the soft market," he said. "There may be a reduction in the decline in some areas, but in global reinsurance terms, there will not be a fundamental change. We may witness some adjustments in the speed of the decreases we are seeing. There may also be some modest firming effect on some commercial and property lines, but more on a regional basis."

Mr. Hartwig also noted that 2004 should go down in history as the year the industry proved its stability "following these unprecedented events."

In 1992, in the aftermath of Andrew, "the market was unraveling," he said, noting that there were bankruptcies, no reinsurance, and companies were looking to drop hundreds of customers. The industry reformed itself, setting up residual and high-risk specialty markets, increasing deductibles, working on improved building codes, and seeking mitigation of risks.

"The result of these four pillars of effort by the industry and public officials has borne fruit today," observed Mr. Hartwig.

The Property Casualty Insurers Association of America noted that in Louisiana its young high-risk pool may not have had enough time to build up a financial cushion to absorb possible losses from Ivan, but other reforms should allow insurers to pay claims.

On Jan. 1, the state's FAIR and Coastal insurance programs were merged into Citizens Property Insurance Corporation, a last-stop market for homeowners unable to find insurance in the private sector for risks from natural disasters. The plan represents 10 percent of the state's market.

In 2003, the state approved a mechanism that allows insurers bond financing to spread the catastrophic loss over a 5-to-10-year period.