The issues facing the insurance industry in the wake of Hurricane Katrina could prove to be far more complex and extensive than what the industry faced in the aftermath of Sept. 11, 2001, industry observers said.
Aaron Davis, vice president of the property syndication group for the insurance broker Aon, said Hurricane Katrina would be a market turning event for commercial property insurance.
Because insurers do not have access to a public-private reinsurance fund, as they did last year in Florida, and damages could rise to as much as $35 billion, insurers could easily "blow through" their reinsurance treaties and have to tap surplus. Insurers expense will also increase because of the need to purchase new reinsurance caps, he said. All these expenses, he said, would eventually be passed on to commercial property consumers.
Insureds will also have to purchase new limits on their flood insurance plans after exceeding this year's limits from the storm, he noted.
The region is already seeing moderation in commercial property, he explained, with substantial increases in catastrophe exposures on wind zone and flood zone aggregate capacity.
"At this point though, it is very difficult to tell how this will ultimately pan out in terms of the overall insure loss, but we certainly view this as a potential market turning event," he said.
He noted that the commercial market picture would be clearer with renewals, but indications are that September and Oct. 1 renewals will see increases.
The fact that hurricane season is at only at a mid-way point also adds to the pricing pressures, he added. The impact on the commercial market is compounded by what will be a high number of claims from an urban area, as opposed to past hurricane events where most of the losses were in suburban or rural areas.
Insurers are also going to be hit with a substantial number of business interruption claims, he noted.
Daniel T. Torpey Partner Practice Leader, Insurance Claims Services at Ernst & Young LLP, and co-author of the book, "The Business Interruption Book: Coverage, Claims, and Recovery," published by National Underwriter Company, the parent of this magazine, said that traditionally, there was a quick period of time for a company closure, but in this case, closure will be for an extended period of time.
The result could be businesses may tap-out their business interruption limits, and insurers could be faced with determining myriad limits based on policy language. Time limits could extend from standard ISO language covering when the business gets up and running, to manuscript language defining extended periods of coverage for "the broadest wording and extended period of coverage." Another complication carriers could face is determining whether the duration of closure was from flooding or the hurricane.
Even after clean-up, there could be issues over what the carriers deem acceptable conditions to restart the business and environmental concerns for health or manufacturing that could keep a business closed.
"We have never seen anything like this before," Mr. Torpey said. "There is the potential for greater discussion of liability issues here more so than we saw in 9/11."
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