Insured Damage Estimates Ballooning In Aftermath Of Hurricane Katrina

Modeling firms Risk Management Solutions and Eqecat Inc. both raised their loss estimates significantly.

RMS in Newark, Calif., raised its insured loss prediction from a range of between $10 billion and $25 billion, to anywhere from $20 billion to $35 billion. Oakland, Calif.-based Eqecat's estimate increased from between $9 billion and $16 billion to anywhere from $14 billion to $22 billion.

August 1992′s Hurricane Andrew was the worst insured loss ever at $20.3 billion in 2003 dollars, with the Sept. 11, 2001 terrorist attacks coming in at $19.5 billion.

"Over the last few days it has become very clear that Hurricane Katrina's devastation, due to the unprecedented amount of flooding, will make it one of the worst natural disasters in U.S. history," said Richard Clinton, president of Eqecat.

RMS said its figures include data gathered on offshore oil platforms that sustained damage when Katrina was at its worst, with sustained winds exceeding 160 miles per hour. Josh Darr, a manager and meteorologist with RMS, said losses from the flooding in New Orleans are still to be calculated and could raise estimates higher.

Fitch Rating Service said the losses are expected to come out on the high end of current estimates and will likely surpass any insured loss the U.S. has experienced.

A loss of "this magnitude always has the potential to stress or even render insolvent some insurers," Fitch added, especially for small insurers with concentrations of risk. "However, it is still too early to tell if this is the case, and if so, who is at risk of financial distress."

Fitch said no insurer it rates is subject to a "Rating Watch," and preliminary analysis of loss exposure indicates insurers should be able to absorb the losses.

Some elements that have not been factored into loss estimates, Fitch said, are looting, the tendency of the size of losses to grow the longer they remain unsettled, and public and political pressures to settle claims where the cause of damage is ambiguous.

While it is unclear what the ultimate impact of Katrina will be on the industry, Fitch said the storm "will have a material negative effect on 2005 industry earnings and, to a lesser extent, surplus."

The inability of adjusters to quickly get into the most devastated areas is affecting insurers' ability to estimate losses, Moody's Investors Services noted. The disputes sure to arise over covered wind versus uninsured flood losses are expected to slow down the claims process. Moody's also expects a high number of auto claims and other complicating factors.

A.M. Best Company said it expects all rated companies to meet their loss commitments, despite the magnitude of the damages. Best added that it expects reinsurers to be heavily affected but also able to absorb whatever losses develop.

Some bond insurers could be facing trouble due to Katrina, noted Standard & Poor's Rating Services. The long-term credit quality for state and local entities are uncertain, and five bond insurers of the nine primary players in the national market are clearly facing losses given the magnitude of their exposure in the region, said S&P.

The five bond insurers with the biggest exposure from Katrina are ACA Financial Guaranty Corp., Ambac Assurance Corp., Financial Guaranty Insurance Company, Financial Security Assurance Inc., and MBIA Insurance Corp.

Overall, the nine primary bond insurers have insured a total of $13.8 billion in bonds of public finance entities whose creditworthiness may have been affected by the hurricane in Louisiana, Mississippi and Alabama, S&P said. The bonds are spread over a variety of sectors, S&P added.

Katrina could have a major impact on commercial property insurance prices, according to Aaron Davis, vice president of the property syndication group at Aon. "We certainly view this as a potential market-turning event," he said.

Because insurers do not have access to a public-private reinsurance fund, as they did last year with the four hurricanes that hit Florida, insurers could easily "blow through" their reinsurance treaties and be forced to tap their surplus, he explained. In turn, reinsurance costs will rise, which will eventually have to be passed along, he said.

The overall commercial insurance market picture will be clearer with renewals, but indications are that coverage expiring in September and October will see increases.

The fact that the hurricane season is only at the midway point also adds to pricing pressures–plus the fact that unlike past storms, a lot of these losses are in urban areas, bringing business interruption claims into play, Mr. Davis noted.

Traditionally, there was a quick period of time for a business shutdown after a disaster, but in Katrina's case, closures will be for an extended period, noted Daniel T. Torpey, partner practice leader for insurance claims services at Ernst & Young LLP.

As a result, insureds may tap out their business interruption limits, and insurers could be faced with determining a myriad of limits based on the policy's language, which could be from a few months to a year or more, added Mr. Torpey–co-author of "The Business Interruption Book: Coverage, Claims, and Recovery," published by The National Underwriter Company, parent of this magazine.

Complicating the coverage dispute could be a difference in opinion over what are acceptable conditions to reopen, he said, with environmental concerns to consider. "We have never seen anything like this before," Mr. Torpey said. "There is the potential for greater discussion of liability issues here than we saw in 9/11."

On the claims front, adjusters were making progress–just starting to get into the worst-hit areas as some power and services began to be restored. Hart Hubbard, assistant vice president of catastrophe services for Parsippany, N.J.-based GAB Robins, a claims management firm, said adjusters are on the ground and more are expected to be sent in as recovery work progresses.

The biggest challenge remained communications, as telephone service is still subject to limited capacity, he said. But power is slowly being restored, allowing the firm to set up claims offices in five cities throughout the affected area. "Every day is getting a little better," he said, "but it is going to be a while before we get into New Orleans Parish."

Insurers are helping customers with their policies on renewals and payments. Some have said they would not issue cancellation notices for a period of time, or have suspended collection of premiums. In Mississippi, Insurance Commissioner George Dale asked insurers to grant a 60-day grace period on cancellations.

Contacting customers is another challenge with phone service out and people dislocated. In Texas, the insurance department, along with the American Insurance Association and individual carriers, has set up a service center near the evacuee facilities for policyholders to begin the claims process. The U.S. Postal Service is also re-routing mail to displaced clients.

On Sept. 7, Louisiana Insurance Commissioner Robert Wooley held a meeting in Atlanta with 480 industry representatives, along with Alabama Insurance Commissioner Walter A. Bell and a representative from Mississippi's insurance department.

Mr. Wooley said that during the meeting there was a discussion of a series of emergency consumer protection declarations the three departments plan to issue in the wake of Hurricane Katrina. He said the declarations are modeled after similar notices issued in Florida last year to deal with its storms.

The meeting's aim, he explained, was to begin a dialogue among all of the interested parties, including representatives of the National Flood Insurance Program, to ensure the industry can implement the declarations and help both consumers and the industry.

The declarations would cover a range of issues including non-renewals, cancellations, premium increases and adjusting of claims. He anticipated this would be the first of a number of such meetings but planned to have the emergency declarations issued by the end of the week.

"We are going to be responsible, as we always are," said Mr. Wooley. "We are going to be methodical. We are going to protect the consumers, but we are going to also work with the industry and try to be a resource, and be part of the solution and not part of the problem."

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Many areas remain off-limits to adjusters as rescue efforts continue. A lack of electricity and phone service, and difficulty reaching displaced policyholders are also huge challenges.