Katrina won't sink insurers

The estimates so far indicate that the damage claims for Hurricane Katrina are set to form the largest insured loss from a single event since the terrorist attacks of 11 September 2001, and potentially worse than Hurricane Andrew in 1992.

The general estimates for the insured damage are between $20bn and $35bn (£10.8bn and £18.8bn), nearly twice the $15.5bn damage caused by Hurricane Andrew, making it the most costly natural catastrophe in US history.

Estimates from catastrophic risk management company Risk Manage-ment Solutions (RMS) predict the total economic loss to exceed $100bn (£54bn), half of this from flooding.

The storm that started on Monday 29 August created a path of wreckage and ruin. Reports say that many hundreds of people are feared dead.

Up to 1,100 oil platforms were in the path of the hurricane, causing shut-downs that cut off 1.4 million barrels of oil.

Oil and gas producer Apache says it has lost nine production platforms. It says it has $150m business interruption in place.

Adding to the US energy woes, nine refineries on the gulf have been closed causing petrol prices to soar.

Up to 80% of New Orleans is flooded with water up to 20 feet deep causing unprecedented property damages that will take perhaps years to repair. The storm tore a path of destruction across four states and reached 200 miles inland.

Many insurers claim it is too early to say how much the storm will cost.

Energy installations
Lloyd's says it expects to receive significant insurance claims as a result of the hurricane, mainly in relation to "offshore energy installations in the Gulf of Mexico, property damage and business interruption".

The claims will affect several syndicates that specialise in energy and property.

Amlin has estimated provisional net losses of $110m (£59.5m).

Sources suggest that Lloyd's syndicates could face claims worth £1bn.

Reinsurer Converium says its losses are likely to be in the range of $10m to $20m (£5.4m to £10.8m).

And Swiss Re says that it expects claims of about $500m (£270.5m). It adds that, based on preliminary estimates, industry-wide losses could total around $20bn (£10.8bn).

However, the reinsurer says the complexity of damage from the storm and subsequent flooding "means estimates have a more than usual degree of uncertainty".

Hannover Re says it expects a pre-tax "loss burden" of €250m (£169.7m).

Standard and Poor's (S&P) says a single storm like Katrina will affect the reinsurance market more than insurers, especially if the claims reach the higher estimates.

Managing director of S&P's US property and casualty insurance ' ' practice Thomas Upton says: "Although damage is still being tallied, we think it is highly unlikely that there will be many ratings changes among the largest affected insurers."

AM Best reflects this view, saying that the insurance industry could cope with $25bn (£13.5bn) worth of losses.

If reinsurers take the brunt of the damage claims, as suggested by S&P, some experts say this will have a knock-on effect on insurance premium rates, pushing them up.

Comparisons have already been made with last year's hurricanes, for which there were four large pay-outs. Katrina will be the first major pay-out which could also result in an increase in reinsurance rates.

There has been evidence of the impact on results for the second half of 2005 with Atrium indicating that Hurricane Katrina will have an impact, although it is too early to make estimates, but the group is still confident it will outperform forecasts.

Atrium chief executive Nick Marsh says: "We believe that although our second half group results will be impacted by this hurricane, reasonable returns can continue to be made for our shareholders this year."

Reinsurer Hannover Re has also been feeling the ramifications of Katrina, stating it was unlikely to hit its profit goal for this year.

Chief financial officer Elke Koenig says:

"I have not said that the guidance can no longer be reached, but I believe it is extremely unlikely."

Koenig also indicated that the hurricane hit at a time when policies were being negotiated for 2006 and it would buoy reinsurance rates.

Munich Re estimates that the damages will cost it up to $489m (£264.6m) but that could change when the full extent of the damages is calculated. A spokesman for the reinsurer says: "The company's initial estimate for total insured damage is between $15bn and $20bn (£8.1bn and £10.8bn)".

As if these losses are not enough, the forecast is that more storms will hit the Atlantic region.

US weather service National Oceanic and Atmospheric Administration (NOAA) predicts that this will be possibly the worst tropical storm season yet.

Projections of an additional 11 to 14 tropical storms from now through to November, with seven to nine of those becoming hurricanes, indicate a 95% to 100% chance of an above-normal hurricane season.

More hurricanes
NOAA administrator Conrad Lautenbacher says: "It is difficult to make any kind of accurate prediction of how many of these will strike land. But, statistically, when seasons are more active, and there are more hurricanes, there is a higher chance of one striking the US."

RMS supports NOAA's prediction, claiming that there will be at least another five tropical named storms to hit the south coast of the US.

Brian Owens, meteorologist and director of technical marketing at RMS, says that while the estimated costs are some of the highest ever, the insurance industry is well capitalised and well positioned to survive the claims.

The impact on insurers' and reinsurers' premium rates, according to Owens, will have an effect in the local areas where the hurricane has hit, but should not create many changes on an international front.

And while reinsurers will pay out a large part of the claims, the costs will, to some degree, penetrate the insurance sector.

"As far as hurricane seasons go, we are only halfway through and historically the last half of the season has 70% to 80% of tropical storm activity," Owens says.

"There are plenty more storms to come. Whether or not they make landfall will mark the difference to the insurance and reinsurance industry." IT