The Post-Katrina World

The frequency of major disasters in the U.S. has created some ugly scenarios for the insurance industry, according to Donald Light, senior analyst with Celent and author of the report “After Katrina: What Now for the Insurance Industry?”

There were four hurricanes that hit Florida last year, Katrina and Rita this year, and we've yet to reach the end of the current hurricane season, which officially ends Nov. 30. “The overall loss patterns insurance normally looks at are small and frequent–such as automobile accidents–and large and infrequent–such as hurricanes. Do we now have to plan for very large and not infrequent?” he asks.

There are a couple of technology areas Light suggests insurers will need to focus on in the wake of Hurricane Katrina and its aftermath–financial/risk modeling and disaster recovery/business continuity. “These are areas insurance companies are going to have to spend a lot more resources on,” he says.

Neither issue is new. “Insurance companies have been doing modeling for years,” says Light. “Certainly disaster recovery got a lot of attention with 9/11.” What is different today in the insurance industry is previous models of catastrophes have changed. “The frequency and the size of catastrophes and how a company should mitigate its risk profile in regard to that are up for grabs,” he asserts. “The kinds of assumptions and analyses that made perfect sense a couple of years ago may not anymore.” For technology vendors selling analytic or scenario-building capabilities or more agility in terms of financial modeling, this is a good time, according to Light. Similarly, the whole issue of disaster recovery and ASP types of applications–including outsourcing–is a situation that can add value to the kinds of propositions those vendors are making.

Light is certain a major disaster such as Katrina will focus the industry on disaster recovery plans. But what usually happens in these cases is six months after the disaster either nothing has been accomplished or the issue has been buried. “It takes a long time to move in terms of major systems additions,” he points out. “Plus, there always are pressing–internally or externally imposed–mandates companies have to deal with.”

While Katrina still is fresh in everyone's mind, though, Light recommends carriers that clearly are within harm's way–those with home offices in places vulnerable to storms and earthquakes, such as the Southeast and California–take a second look at their plans. He adds such plans can't be limited to hurricane- or earthquake-prone areas, though, when the nation faces the prospect of a major terrorist attack, which could happen in any large metropolitan area in the U.S.

“The importance of Katrina is it was not only a major disaster but it is one where the recovery is going at such a slow pace,” says Light. “It's a very prolonged process. That may help give the continuity kinds of technologies a little more clout in terms of staying at the top of the list for a longer amount of time. From a business continuity point of view, that's the big impact of Katrina.”

Insurers plan for the worst probable disaster, Light explains, but Katrina instead shifted the view from worst probable to worst possible. “By definition, you don't plan for [worst possible] because you have other things you have to do with your life,” he says.

Other considerations are industry capacity for disasters and whether government/public sector capacity for handling these kinds of catastrophes should be expanded. “There clearly is going to be a reexamination of national-level catastrophe pools, which I think have some merit to them given what seems to be a social/political decision we've made as a country to pitch in and rebuild,” he says. “The talk already has started, and I wouldn't be at all surprised if we get some serious consideration of some national or regional pools and if some of them actually come into existence.”

Katrina will have long-term impact on the insurance industry, Light believes. “The industry is going to have to reexamine what kinds of coverage it is providing, at what prices, and in what geographic areas,” he says. “There always are going to be winners and losers in that regard. Pricing and underwriting skills are not commodities. Some companies are better at getting people and technology, and others are worse.”