Insurers and reinsurers must reassess how they rate natural catastrophe risks following Hurricane Katrina, according to Andrew Beazley, chief executive of Beazley, but he added that he did not believe that such risks were fundamentally uninsurable.
Addressing the Houston Marine insurance seminar, Beazley described Hurricane Katrina as a “market-changing event” that, in many instances, revealed prevailing premium rates to be wholly inadequate.
“In some areas, such as energy, underwriters will need a complete re-evaluation of their exposures and of the premiums needed to take on such risk,” he said.
“It may be the case that, this year and last, a combination of high sea temperatures in the tropical North Atlantic and faster than normal trade winds has made hurricanes more likely.
"And it is unquestionably the case that property concentrations and values in areas exposed to these hurricanes have risen and continue to rise as more and more people seek to live in coastal regions.
"But neither of these developments makes the risk impossible to quantify and therefore insure. They just make it more costly to insure and the size of exposures difficult for the domestic and world markets to digest.”
He predicted that the scale of losses from Hurricane Katrina – currently estimated at between $40bn and $60bn – would “test the appetite of many” for such risks, particularly following the 2004 US hurricane season, in which four storms brought insurance losses of approximately $25bn. But Lloyd's underwriters “will not run for the hills,” he added.
“Our history has been one of creating capacity for risk, as evidenced by the growth of our writings for terrorism since the tragedy of 11 September 2001. Nevertheless we need to know how much risk we are taking on and be paid adequately for such risk.”
Beazley said that underwriting natural catastrophe risks is complicated by the fact that losses are often highly sensitive to the performance of government-led disaster recovery efforts.
He argued that, difficult though it may be, insurers rate-setting should reflect estimates of the quality of catastrophe protections and disaster recovery plans.
“The reality is that when it comes to a major catastrophe of this kind, we the insurance community, city government, state government and federal government are all in the same boat. The way each of us performs will affect the outcome for all of us.”