Observers of the insurance industry are wondering aloud whether Hurricane Katrina will have long-term effects on the industry and the way it views its business.
In a report titled "After Katrina: What Now for the Insurance Industry?" by Donald Light, senior analyst for Celent, a research and consulting firm (www.celent.com), questions are raised about Katrina's long-term implications.
Mr. Light told National Underwriter the industry will be impacted in three important areas in the aftermath of Katrina.
One issue is whether the industry has "the logistics" to determine its exposure to this and other storms and permit it to do "a fair and humane job" of settling claims. Secondly, while the major insurers can handle the magnitude of claims, what affect will it have on smaller companies with potentially large exposure in the affected Gulf region?
The third issue is whether the industry needs to review its pricing structure and risk assumptions and make fundamental changes to its loss exposure. If there is a fundamental shift in weather patterns, the industry will need to consider pricing its exposure to deal with continuous large losses. He noted that under such a scenario, there would need to be more thought about a private-public partnership when it comes to insurance loss exposures.
If there is a change in loss patterns, he said, the industry could be looking at loss activity of $50 billion two-to-three times annually.
"Maybe the industry will have to begin looking at those loss assumptions," he said.
The industry will need to turn more and more to technology for making these loss forecasts, he noted. Those that so far have not will have to begin now. The one advantage for insurers, Mr. Light noted, is that this technology for analysis and modeling is available now–it's just a question of getting it and using it.
Earlier this week, Fitch Rating Service said Katrina could ultimately cause it to reassess "the core risk profile of the property-casualty insurance industry." Any change at this time, however, is premature, and it is keeping a stable ratings outlook on the industry.
Some issues that could change its risk profile include:
o The reliability of catastrophe modeling.
o Resolution of the suit filed by Mississippi Attorney General Jim Hood over whether a homeowners policy should cover flood losses.
o The amount of loss retained by insurers and how much is covered by reinsurance.
o How much rate increases from reinsurers ultimately will be and if those increases will have a material effect on primary companies.
If Mr. Hood were successful in his suit, Fitch said it would have a profound negative impact on the industry and insurers would have no recourse to reinsurance.
Despite these concerns, Fitch said it believes the industry will not be in for a hard-market cycle on par with what occurred after Sept. 11, 2001. It reasoned that while significant, the losses will not extend across lines of insurance as was the case in 9/11.
Operationally, as Mr. Light noted, the industry is being spread thin and increased claims volume could be harder to handle.
"The industry is performing as well as could be expected," Fitch said, but "we believe another major event in the near term could be very difficult for the industry to absorb operationally."
Since Katrina, there have been six named storms in the Atlantic and Gulf of Mexico, two of which made landfall.
Ophelia, a Category 1 storm on the Saffir-Simpson scale, with sustained winds at 95 mph or less, hit the North Carolina coast last week. AIR Worldwide estimated damage would not exceed $800 million.
Rita, passing southern Florida yesterday, left little damage, but the National Weather Service said the storm is intensifying and is already a Category 4 hurricane with sustained winds of 135 mph. Rita is expected to strike the Gulf Coast anywhere between western Louisiana and northern Mexico by Saturday morning.
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