Hurricane Katrina Could Wind Up As Biggest Insured Loss Ever

There is no doubt insurers will play a huge role in the massive recovery effort–although the final tally for insured losses remains very much up in the air. For one thing, rescue workers had trouble reaching many of the stricken areas, let alone insurance adjusters. For another, questions remain about how much of the damage was caused by flooding, rather than wind, and is thus not insured by private carriers.

Katrina slammed into the Gulf region on Monday morning, Aug. 29, as a Category 4 storm on the Saffir-Simpson scale, with sustained winds of 145 miles per hour. The National Weather Service said the center of the storm crossed the mainland 30 miles east of New Orleans. But with winds extending out for 125 miles, it struck Mississippi and Alabama hard, leveling Gulfport and Biloxi, Miss., and Mobile, Ala., with a storm surge exceeding 20 feet.

Katrina packed a one-two punch, hitting Southern Florida first as a Category 1 hurricane with maximum sustained winds at 75 mph, causing an estimated $600 million in insured losses before even striking the Gulf Coast. A number of Floridians died as a result of the storm, but Katrina then caused the death of hundreds, if not thousands of people throughout the Gulf region.

The day before Katrina struck the Gulf Coast, an Oakland, Calif.-based modeler, Eqecat Inc., estimated insured losses at between $15 billion and $30 billion. It dropped its estimate last Monday afternoon, to between $9 billion and $16 billion because the storm had weakened from a Category 5 in the Gulf with sustained winds at 175 mph.

Rival modeling firms had similarly wide ranges in their damage estimates. Newark, Calif.-based Risk Management Solutions put the insured loss at between $10 billion and $25 billion, while Boston's AIR Worldwide Corp. came in at between $17 billion and $25 billion.

Fitch Ratings Service said Katrina would likely be the "largest insured loss from a single event" since 9/11, and the largest loss since Andrew.

For the industry, while the losses are staggering, Robert P. Hartwig, senior vice president and chief economist with the Insurance Information Institute in New York, said Katrina would not alter the overall softening market cycle, noting that there is still plenty of capacity available. He said that the industry suffered over $20 billion in insured losses last year from four hurricanes and that did not affect the cycle outside of local property-catastrophe rates.

"An event like this has a localized effect," Mr. Hartwig observed. "Yes, it creates local, hard property markets, both commercial and homeowners in the Gulf Coast region and Southeast Atlantic Coast, and firmness in reinsurance prices for commercial property-catastrophe coverage, but on a regional basis."

He agreed with other industry observers that the large insurers are financially strong and would not suffer any insolvencies due to the Katrina losses. However, smaller insurers operating in one or two states may "see some precarious financial circumstances," he added.

"The magnitude of an event like this is what [the major insurers] plan for," he explained. "For insurers, it wasn't a matter of 'if,' but 'when.'"

He said that while there will be debates over whether a home or business suffered damage from the hurricane or flooding, many in the affected region did not have flood insurance. From his own calculations, it appeared that between 30- and 60 percent of property owners in Louisiana purchased flood insurance. However, the figure was only 10 percent in Mississippi. He did not have figures for Alabama.

Under the National Flood Insurance Program, as of Sept. 30, 2004, there were 376,681 flood policies in place in Louisiana, 41,946 in Mississippi, and 41,336 in Alabama.

What will be different about Katrina, Mr. Hartwig went on to say, is that business interruption coverage will come into play. He expected significant commercial losses–unlike previous hurricanes, where the bulk of claims were by homeowners.

The storm could have a huge impact on reinsurers, who could be on the hook for sizable losses from the one mega-event, according to Standard & Poor's Insurance Rating Services.

Munich Re estimated its share of losses at $493 million, while Hannover Re said the storm ruled out the company reaching the upper end of its anticipated profit margin. The company had based its profit projection on damage claims for the year to be within its multi-year average, which is 6 percent of property-casualty premiums.

Besides claims from businesses in New Orleans, and the casino businesses along the Mississippi Gulf Coast, the oil, gas and chemical sectors all had substantial exposures.

Bruce Jefferis, managing director of Aon's natural resources practice group, said no one knows the extent of damages to oil platform and undersea pipe lines, but there was "certainly" the potential for substantial losses. However, until facilities can be inspected, any estimates of damage would be highly speculative.

Last year's Hurricane Ivan, he noted, caused $2.7 billion in losses to oil facilities. He noted, too, that insureds bought coverage based on "the worst-case scenario," so there should be sufficient insurance in place.

One positive, he noted in an e-mail to National Underwriter, is that "the highest concentration of offshore energy values was on the west, or better side of the storm. So, like Ivan, the turn to the north, and then east, is relatively good news. There is still, however, an expectation of significant damage."

On Aug. 30, Lloyd's of London issued a statement saying it expected to receive significant insurance claims as a result of Katrina–primarily to offshore energy installations in the Gulf. The market asked all syndicates at Lloyd's to supply details of the likely impact on their businesses by Sept. 12.

The day after the storm hit the Gulf region, insurers were poised to begin work with adjusters and mobile claims offices were being established.

Joe Annotti, a representative for the Des Plaines, Ill.-based Property Casualty Insurers Association of America, said carriers were waiting to get into the devastated areas but were held back by flooding.

Hart Hubbard, assistant vice president of catastrophe services for Parsippany, N.J.-based GAB Robins, a claims management firm, said it might take until this past weekend before adjusters could begin work.

While Katrina is significant in terms of insured losses, it could also prove to be significant in loss of life. More than 100 were reported dead in Mississippi, and two dead in Alabama. Louisiana officials have not released figures, but New Orleans Mayor Ray Nagin reportedly said the death toll could go into the thousands.

If that were the case, Katrina would be one of the deadliest hurricanes ever, joining two other Category 4 storms–the Galveston, Texas, hurricane of 1900 that took the lives of more than 8,000 people, and the 1928 Lake Okeechobee hurricane in South Florida, which took more than 2,500 lives, according to the Atlantic Oceanographic and Meteorological Laboratory, part of the National Oceanic and Atmospheric Administration.

More than two million people are without power this week, and it will be weeks before power can be restored, and months before families can return to see what is left of their homes.

While floodwaters receded in Mississippi and Alabama, New Orleans got worse after the storm had passed. Initially, people felt the city was spared the worst wrath of Katrina, with the weaker, western side swiping the city. Then two levies broke.

New Orleans sits below sea level, with the Mississippi River to the south and Lake Pontchartrain to the north. The levies broke along the lake, and water began flooding the city. By Aug. 31, officials said everyone needed to get out.

It is early September and there are still two months left in the hurricane season. The 12th named tropical storm, Lee, was expected to weaken in the Atlantic as this story went to press. The next named storm would be called Maria.

Flag: NU Data Insights

Head: Who Has The Coverage?

While it is too early to know exactly how bad of a loss individual commercial property insurers suffered in Hurricane Katrina, figures collected through National Underwriter Insurance Data Services-Highline Data provide a glimpse of who might have the biggest exposures.

o Louisiana: St. Paul Travelers Companies writes the biggest chunk of commercial property in the state with 13.5 percent of market share. State Farm Mutual is second, writing 12.9 percent, and Zurich Insurance is third at 10.6 percent.

o Mississippi: Zurich Insurance Co. leads in commercial property with 14.6 percent, followed by St. Paul Travelers Companies at 12.8 percent and State Farm Mutual Group at 9.3 percent.

o Alabama: St. Paul Travelers is the number-one writer in Alabama with 9.7 percent of the market, followed by State Farm Mutual at 7.6 percent, and Zurich Insurance at 7.4 percent.