Storm Warnings:

As Insurers Tally ’04 Hurricane Losses, Experts See Similar Seasons Ahead

The property insurance industry sustained record third-quarter losses this year after a series of storms, including a string of hurricanes, according to preliminary estimates from Insurance Services Office Inc. (ISO).

At the same time, new research is suggesting that the industry should plan for a similar multiple-event barrage of storms every dozen years or so.

Eight catastrophes, including hurricanes Charley, Frances, Ivan and Jeanne, contributed to $21.3 billion in insured property loss claims, according to New Jersey-based ISO. That figure compares to $3.7 billion from last year’s third quarter, $715 million in the third-quarter 2002 and $19.15 billion in the third-quarter 2001–the previous record, which included $18.8 billion in insured property losses from the Sept. 11 terrorist attacks.

For the first nine months of 2004, insured losses stand at $24.7 billion, second only to the $26.1 billion from the first nine months in 2001. Last year, insurers lost $10.2 billion in the first nine months.

More than Andrew
This year’s four major hurricanes together accounted for an estimated $20.5 billion–just over the $20.3 billion loss caused by Hurricane Andrew in 1992, in inflation-adjusted terms, ISO spokesman Dave Dasgupta said.

Catastrophes were more frequent and more focused this year than usual, with many storms following similar paths, Dasgupta added.

“It’s very unusual–in not many instances do you have back-to-back hurricanes like this,” he maintained.

Florida suffered the most insured losses at $17.5 billion, while Alabama incurred $1.2 billion and Georgia sustained $445 million.

The four hurricanes together account for a huge hit to insurance companies, surpassed only by the $32 billion in total losses due the Sept. 11 terrorist attacks, said Jeanne Salvatore, vice president of consumer affairs at the Insurance Information Institute.

Insurance companies have reported that third-quarter profits were pummeled by the hurricanes. Allstate Corp., the second-largest U.S. property casualty insurer, said its quarterly earnings plummeted 92 percent because of the hurricanes that battered Florida and the Southeast.

Commercial insurer St. Paul Travelers Companies Inc. also reported lower earnings in the third quarter, as did Ace Ltd., HCC Insurance Holdings Inc. and Midland Co.

The good news, if there can be any out of such a fierce hurricane season, is the lack of insolvencies. This suggests that the market will remain strong, according to Joseph Annotti, vice president of public affairs at the Property Casualty Insurers Association of America.

Insurance rates in Florida may climb and companies might need to re-examine their pricing structures, but “unlike after Andrew, there will be no exodus of insurers leaving the state,” Annotti said.

While most observers took some comfort in the idea that it is unlikely that the U.S. will again see a hurricane season like that of 2004, at least one risk modeling firm has warned that may be wishful thinking.

Not so rare after all
According to AIR Worldwide (AIR), the 2004 hurricane season should not be considered rare. The firm’s analysis, based on its own hurricane model, revealed that insurers should expect to see four hurricanes make landfall in the U.S. approximately once every dozen years. The expected frequency of four loss producing hurricanes in Florida is about once every 150 years–still within the range to which most insurance companies manage their catastrophe risk.

In terms of hurricanes’ financial impact, which as noted ISO estimates would likely exceed $20 billion, AIR cautions that insurers should expect to see similar aggregate losses in a single season about once every 13 years for the U.S. and about once every 24 years for Florida.

“Insurers and reinsurers should certainly consider the probability of multiple event seasons when analyzing catastrophe risk,” said William Riker, president of RenaissanceRe Holdings Ltd., which writes a relatively large share of the Florida market.

For many insurers the potential loss from individual hurricanes, rather than the accumulation of losses from multiple events, has been the dominant issue when analyzing catastrophe risk. “For the past 15 years a single event has driven most of the annual hurricane losses,” said Uday Virkud, AIR senior vice president. “However, this past season, which is not unusual when compared with long-term historical experience, demonstrates how important it is for companies to recognize the likelihood of multiple-event seasons when analyzing catastrophe risk.”

Florida Farm Bureau, which writes 100 percent of its business in the state, has been using the AIR hurricane model to manage risk from multiple-event seasons for a number of years.

Threat of moderate events
“The greatest threat to surplus may not be a severe event, but rather an accumulation of moderate events,” added John Rollins, Florida Farm Bureau’s chief actuary in a September 2002 conference presentation. “The AIR hurricane model tells us we face the potential risk of several small to moderate hurricanes in a single season. Several hits to a retention can add up very quickly.”

Although the 2004 hurricane season was the most active since 1986, when six hurricanes made landfall in the U.S., there have been six years since 1900 with at least four hurricanes making landfall in the U.S.

Furthermore, AIR’s analysis also revealed that 2004 would be one of eight years in the last 100 in which losses would exceed $20 billion, adjusting for current property densities and values.

“The 2004 hurricane season is above average, but not extraordinary from either a frequency or an aggregate loss perspective,” said Virkud.