The gathering storms

As the residents of New Orleans returned to their homes last week after the city missed the worst of hurricane Gustav, insurers have begun counting the cost of the damage.

The insured losses from the destruction wrought by Gustav could top $10bn (£5.7bn). If these initial estimates are correct, Gustav will rank among the top 10 most costly hurricanes ever to hit the US.

But the 2008 hurricane season is far from over, only passing its halfway point yesterday.

Forecasting organisations are predicting that this year will be one of the worst hurricane seasons of the decade. August and September are the most active months of the hurricane season and experts say there have been twice as many storms as usual.

As Insurance Times went to press, another hurricane, Ike, was pummelling Cuba and leaving a trail of destruction in the Caribbean.

Ike, which followed tropical storm Hanna, intensified last week into a category 4 storm, but has since been downgraded to a category 3. Experts have warned that it could strengthen again, however.

“Ike must now be considered a major threat to the southeast US coast,” ratings agency Fitch warned this week.

Meanwhile, tropical storm Josephine is building in the Atlantic basin.

On average each year, there are 10 tropical storms, of which six develop into hurricanes. There have already been 10 tropical storms so far this year, with four building into hurricanes.

“This year will be one of the most active years this last decade,” says Dr Mark Saunders, lead scientist and project manager at Tropical Storm Risk, a hurricane forecasting organisation.

Two of this year’s four hurricanes have hit the US – Dolly and Gustav. With Hanna, Ike and potentially Josephine bearing down on the southern coastline, insurers will be bracing themselves for further losses.

“This year will be one of the most active for hurricanes this decade.

Mark Saunders, Tropical Storm Risk

The losses from Dolly and Gustav will push US catastrophe losses this year past the $15bn mark and potentially close to $20bn, according to Fitch. This already surpasses the $6.5bn paid in catastrophe losses last year and is the highest total since $61.9bn in 2005, when Katrina ravaged New Orleans.

The major catastrophe modelling firms estimate that insured losses from Gustav will total between $4bn and $10bn. If the actual losses come in towards the top of the range, Fitch says Gustav would be the largest US hurricane loss since Wilma in October 2005 and one of the top five most costly hurricanes to hit the US.

“From a ratings perspective, while it is possible that losses from Gustav could be material for some individual insurance companies, the insurance lines most affected by the storm [homeowners and commercial multi-peril property] are generally dominated by large insurers with significant financial strength,” says a Fitch report.

The agency does not expect Gustav to have a big impact on the health of those larger insurers. “Based on current loss estimates, this storm represents far less than a 1-in-a-100-year event. However, the possibility does exist that smaller insurers, particularly those with concentrated geographical focuses, could be materially affected,” says Fitch.

Ratings agency Moody’s Investors Service agrees. Paul Bauer, a senior analyst, says: “Based on 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.”

Moody’s says the relatively manageable size of the expected losses means the industry is unlikely to see a change in the generally declining pricing environment within the property and casualty sector.

It also notes that the insurance industry’s risk management and underwriting practices have improved since Katrina.

Insurers have reduced their exposures and increased deductibles since the devastating hurricane of 2005. Inactive hurricane seasons in 2006 and 2007 have helped insurers to build up reserves.

Bauer says: “Though the insurance industry appears to have been spared a potentially more damaging event, the near miss of Gustav, as well as the storms brewing right behind it, 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.”

Fitch says that while Gustav is a large enough event to potentially slow the decline in rate prices in the US property/catastrophe insurance and reinsurance market, it is unlikely to be big enough to push prices back up or even to halt the drop entirely.

“The ultimate impact on prices could depend on how much higher above-average catastrophe losses end up in 2008 as the rest of the season unfolds,” says Fitch.