Gustav Insured Loss Could Hit $10 Billion As Hurricane Hanna Heads For U.S. Coast

On Gustav, residents and their insurers were relieved the hurricane didn't cause as much damage as feared, as the storm landed west of New Orleans, where the levees–breached by Hurricane Katrina three years ago–withstood a major storm surge.

The top damage estimates include losses from oil and gas production fields, which felt the brunt of Gustav as a Category 3 storm, with sustained winds topping 115 miles-per-hour.

To recap the early estimates from the catastrophe modelers:

o Eqecat, based in Oakland, Calif., at first said insured losses from Gustav could range from $6 billion to $10 billion–primarily in Louisiana for onshore losses. After its initial loss estimate, the firm sent out a revised estimate, dropping the loss range to $3 billion to $7 billion.

While not issuing an estimate for losses from the storm to oil and gas production fields along the Gulf of Mexico, Eqecat did say it expects 5 percent of production for oil and 5 percent of gas production capacity to be shut off for the next year.

Eqecat said its onshore loss numbers include expected demand surge for products and services, in addition to property losses and business interruption claims.

o Risk Management Solutions in Newark, Calif., estimated insured losses could range between $4 billion and $10 billion, including onshore and offshore losses.

RMS said losses for offshore damage to oil platforms and wells, including production interruption, could range from $1 billion to $3 billion. Onshore losses for both residential and commercial properties–including business interruption–could run between $3 billion and $7 billion. The estimate does not include losses covered by the National Flood Insurance Program.

o AIR Worldwide Corp. issued a lower estimate range between $2 billion and $4.5 billion, not accounting for flooding for onshore losses.

Steve Smith, president of ReAdvisory, part of the Carvill Reinsurance brokerage, said that while loss estimates range between $5 billion and $10 billion, "our view is that losses will be toward the bottom of this ranges."

Losses from Gustav had the potential of being much worse, noted several of the modelers, as the storm was feared to hit the region as a Category 4, which would have meant sustained winds between 131 mph and 155 mph on the Saffir-Simpson scale.

Instead, Gustav hit the energy production fields in the Gulf of Mexico off the Louisiana coast as a Category 3 storm, with sustained winds at 115 mph.

"Offshore damage was not as extensive as originally anticipated, as Gustav weakened from a Category 4 hurricane to a Category 3 storm before blustering into the platforms," observed Christine Ziehmann with RMS. She noted the platforms are "fairly resistant" to storms of this intensity and said structural damage and impact to production would be relatively low.

As for the hurricane's impact on the overall market, A.M. Best Company in Oldwick, N.J., based on early estimates of $2 billion to $10 billion of insured losses, said it does not expect Gustav "to change the current competitive dynamics facing insurers and reinsurers."

While noting that the losses are considerable in comparison to the overall premiums collected for the coverage of the losses incurred, Best said the insurance and reinsurance markets overall are expected to remain competitive.

Standard & Poor's Ratings Services in New York–basing its statement on early estimates of insured losses from Gustav at $3 billion to $6 billion onshore, and $1 billion to $4 billion offshore–said it believed Gustav's impact is insufficient to have a material effect on pricing trends in either the primary or reinsurance markets.

The firm also does not believe there will be much influence on the creditworthiness of the industry as a whole, adding that few, if any rating changes will result.

Given the range of preliminary insurance loss estimates of $3 billion to $10 billion, Moody's does not expect the event to significantly impact the credit profile of most property-casualty insurers and reinsurers.

"Based on our initial discussions with companies, we believe that while Hurricane Gustav will have an earnings impact, it is not likely to have a material capital impact for most industry participants given robust capital generation over the past several years," said Moody's Senior Analyst Paul Bauer.

Moody's agreed that the Gustav losses alone are unlikely to prompt a change in the generally declining p-c pricing environment.

"Though the insurance industry appears to have been spared a potentially more damaging event, the near miss of Hurricane Gustav, as well as the storms brewing right behind it, nevertheless serves as a reminder that catastrophe exposure remains one of the industry's most crucial credit risks, and that its effective management should remain one of the industry's most important disciplines," said Mr. Bauer.

Chris Waterman, a senior director in Fitch's Insurance Group in London, was quoted by Reuters as saying the hurricane was "more of an earnings event for reinsurers," with no devastating impact on the industry's capital. He said insured damages are probably in line with projected loss estimates.

He said the event might slow U.S. reinsurers' falling rates, but was unlikely to halt them completely.

S&P called Gustav the latest–and the most severe–catastrophe in a year of an unusually high frequency of modest-sized disasters, along with large individual commercial claims.

The rating firm said this is a contributing factor in the revision of its outlooks on some companies, reflecting adverse turns in their performance as a result of an accumulation of exposures to these modest catastrophes.

It is possible that further accumulated losses from small catastrophes–or a substantial loss from one of the currently developing storms, Ike and Josephine–could have a more material adverse effect on ratings, S&P added.

Should this happen, S&P said the firm believes that compared with 2005–when Hurricanes Katrina, Rita and Wilma struck–the effects would be more pronounced on primary companies and less on reinsurers, because of the generally greater retention of property risk by primary companies over the last year or so.

This will be especially true, S&P said, if the year's pattern of greater frequency and less severity of catastrophes continues.

Best said that although losses from Gustav are considerable in comparison to the overall premiums collected for the coverage of the losses incurred, the insurance and reinsurance markets overall are expected to remain competitive.

In Best's view, losses from Gustav will continue to put pressure on the huge differential between affordable and actuarially sound primary insurance prices in hurricane-exposed regions.

The impact on reinsurance costs in the Gulf region, Best said, is not expected to be significant, but the actual impact will play out over the next few months.

This hurricane season, said Best, is demonstrating the considerable risk that was previously projected, and with more storms in the Caribbean, there is reason to be concerned over the potential of a Category 3 hurricane with winds from 111-to-130 mph.

Additional storms, Best said, are likely to bring a dose of reality to the competitive property-catastrophe markets and stem further declines in pricing in 2009. Best said it expects reinsurers are again recognizing that the potential for loss cannot be ignored and the competitive confidence of some underwriters will wane.

Gustav should not be a solvency event for insurers, according to Best. But it said those companies that have a meaningful Louisiana property and Gulf marine market share will be evaluated to determine the extent of the loss relative to Best's loss expectations.

Often events such as Gustav raise more issues relating to risk management capabilities than solvency concerns, Best noted.