Hurricane Katrina to Cost $40-$55 Billion for Privately Insured Losses

Hurricane Katrina is expected to result in $40 to $55 billion in private insurance payments, according to a new white paper developed by the Tillinghast and Reinsurance businesses of Towers Perrin. “Hurricane Katrina: Analysis of the Impact on the Insurance Industry” notes that the estimate allows for a significant “demand surge” (increase in local market costs due to vastly increased demand), but does not include specific Hurricane Rita event costs.

“Katrina will displace the Sept. 11 terrorist attacks as the single most expensive insured occurrence in the U.S. to date,” said Patricia Guinn, managing director. “The consensus estimate for Sept. 11 insured losses is approximately $35 billion; Hurricane Andrew produced $20 billion in insured losses. Perhaps the most worrisome lesson from Katrina is that losses measured in the tens of billions are becoming much more commonplace due to the growth in coastal property concentrations.”

Tillinghast expects individual lines of business will have the following losses: personal lines, $15.2 to $19.3 billion; commercial lines, $19.7 to $25.3 billion; marine and energy, $4 to $6 billion; liability, $1 to $3 billion; other, up to $1 billion.

“We expect the insurance market to react to these losses somewhat differently than it did following Hurricane Andrew and Sept. 11,” observed Stephen Lowe, leader of the firm’s global P/C insurance consulting practice. “Now, the market is coming off of a three-year hard market with reasonable profitability. Although softening had started to appear, we believe this trend toward lower pricing will reverse selectively, particularly in property catastrophe and property per-risk reinsurance, along with energy and marine.”

Towers Perrin’s white paper suggests a number of critical implications, including a closer look at who in the industry will bear most of the insured loss, increased pressure from rating agencies for stronger capitalization, the heightened awareness of CEOs to make risk management a top concern, rise in hurricane activity and the role private insurance plays in disaster recovery.

Tillinghast expects the reinsurance market to absorb +/-50 percent of the losses from Hurricane Katrina, significantly more than in 2004 when reinsurers bore 20 percent of the losses from the four hurricanes that hit Florida. Direct insurers will retain almost all of the remainder of the total insured loss from Hurricane Katrina; only 1 percent to 3 percent will be borne by the capital markets through catastrophe bonds and insurance derivatives.

Katrina and Rita have caused rating agencies to take a careful look at plans to replenish capital. Rating agencies are expected to urge companies writing catastrophe exposed business to improve risk management systems and controls, and to provide stronger capitalization to support increased risk.

Insurance CEOs will take a hard look at the mix of risks in their portfolio and reinsurance protections, focusing on further improvements to their geographic mapping and catastrophe models in commercial lines and business interruption exposures. This event will almost certainly cause a shift in the industry’s perception of what constitutes adequate reinsurance protection.

Additionally, the white paper notes hurricanes will be more frequent than public perceptions based on recent memory and could possibly be more severe.

Expect public debate on the role private insurance plays in disaster recovery and what role, if any, the federal government should have in supplementing the insurance industry against very large losses.