Although the number of displaced people from this season's hurricanes is staggering, one of the main costs facing insurers is business interruption claims.
"Insurance companies will pay billions of dollars in business interruption losses as a result of Hurricane Katrina, but how many billions is still anyone's guess," analysts for Advisen wrote in a recent bulletin. "Business interruption losses are difficult to estimate under the best of circumstances. The still-evolving situation in the aftermath of Katrina means that it will take months before insurers have a good handle on their business interruption liabilities."
Calculating hard numbers is difficult for a variety of reasons. As of this writing, many parts of the area still were not accessible to adjusters, and the environmental impact of the storms and flooding may not be fully understood for years. An added complication is the uncertainty regarding insured and uninsured losses. Although insurers are arguing that most of the damage was the result of flooding lawsuits have been filed challenging that assumption.
Tillinghast, the actuarial consulting firm, estimates insured losses resulting from business interruption at $5 billion to $9 billion. The estimate includes both business interruption and contingent business interruption losses. "Because of the importance of the Port of New Orleans, many companies throughout the country will be affected indirectly by Katrina, but very few buy contingent business interruption coverage (probably less than 3 percent)," wrote the authors of a recent Tillinghast report. "The take-up rate on business interruption coverage is a critical but uncertain component of the estimate. We believe less than half of the loss is insured."
Although most analysts agree that, in many areas, 100 percent of commercial enterprises were unable to remain open for business, Tillinghast contends that a large part of that is not covered by business interruption insurance. "Even where there is insurance, time element waiting periods, coverage exclusions, time limits on coverage, and other factors will reduce the actual insured amount," according to the report.
As of Oct. 6, Tillinghast had estimated direct industry losses from Katrina at $40 to $55 billion. That figure excludes damages that currently are being attributed to flooding, but includes a provision for liability insurance claims arising from allegations relating to pollution, negligent health and nursing home care, errors and omissions by insurance agents in explaining coverage, and other possible causes of action.
The firm's analysts have broken down the total estimated losses by lines of coverage. They estimate homeowners' and personal property losses at $14 billion to $17 billion, again assuming that direct damage from flooding will not be covered. Unlike homeowner policies, however, flood is covered under the automobile comprehensive coverage of standard U.S. personal auto policies, the firm noted. Insured losses resulting from personal automobile coverage are estimated at $1 billion to $2 billion (net of salvage).
Excluding business interruption, Tillinghast estimates direct insured losses to commercial properties from the combination of wind, storm surge, and flooding at $13.5 billion to $16 billion, with a further $200 thousand to $300 for commercial vehicle claims. The marine and energy businesses, including business interruption, are estimated to have suffered $4 billion to $6 billion in damages. Liability lines of business, including directors and officers liability, professional liability, environmental liability, and general liability, are expected to cost insurers $1 billion to $3 billion, including defense costs.
The ultimate costs of additional living expenses in personal lines and business interruption in commercial lines will depend on the length of the recovery process. Although estimates of aggregate natural catastrophe losses have a tendency to evolve upward over time, Tillinghast believes that Katrina's losses are likely to develop somewhat more slowly due to the greater-than-normal involvement of commercial lines and the effect of flood and surge losses. In short, it may be years until the actual losses from the hurricanes can be calculated with any accuracy.
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