Hurricane Katrina’s Widespread Damage to Impact All Lines of Insurance

When Hurricane Camille struck the Gulf Coast areas of Louisiana, Mississippi, and Alabama in August of 1969, residents likely thought they would never see another storm with such power. In Camille, a legend of death and destruction was born.

Thirty-six years later, the name Katrina has long-time residents realizing that a new legend has come of age.

As a nation watched in horror, Hurricane Katrina left her own version of death and destruction from New Orleans, La., to Mobile, Ala., and it may be weeks or even months until the final death toll and monetary destruction is known. Decades from now, the Gulf Coast will still have Katrina on its mind.

When Camille made her deadly run through the Gulf Coast in ’69, she left behind more than 200 dead and caused some $1.5 billion in property damage. At the time, Camille had made her way into the record books as one of the deadliest storms to ever hit the U.S. mainland.

Insurance industry officials have estimated the total economic loss from Katrina could be anywhere from $100 billion to $125 billion in damages, and that figure could very well increase in the weeks to come.

While New Orleans escaped Katrina’s initial hit without severe destruction, it was the breaking of several levees that flooded the city and will end up costing billions in damages.

According to Risk Management Solution’s latest figures (as of Sept. 10), insured loss estimates for flood damage from Katrina were between $15 billion and $25 billion (the estimate for Katrina’s flood damage does not include National Flood Insurance Program coverage, only estimated private insurance costs for flood damage).

RMS officials noted, “It is widely recognized that Hurricane Katrina has created numerous sources of loss, from the offshore and onshore wind and storm surge effects to the devastating flooding in New Orleans. RMS has modeled the flooding in New Orleans as a separate physical phenomena distinct from the wind and storm surge effects due to fact that the flooding was a result of the failure of the levees.

“Insurance losses from Hurricane Katrina’s second landfall will be extensive, and assessing these losses will be a complex undertaking due to the impacts across multiple classes of business; the overlap of wind, storm surge, and flood damage in many of the most severely-affected areas; and extensive business interruption and demand surge.”

Damage across the lines

As can often be the case with a storm of this magnitude, the vast array of destruction from Katrina was spread across a number of insurance lines, from homeowners, to autos to marine.

Don Griffin, vice president of personal lines for the Property Casualty Insurers Association of America told Insurance Journal, “The widespread damage associated with this storm will have a significant impact on all lines of insurance. However, with the extensive flooding, wind damage and the evacuation of an entire metropolitan area, we would expect to see the lines of insurance impacted in roughly the following order: flood insurance, homeowners, commercial property, automobile, workers’ compensation, life insurance, health insurance and liability insurance.”

Griffin noted that residual markets will also take their share of losses.

“Based on the early reports, we expect the residual markets to be hit fairly hard,” Griffin said. “For instance, Citizens in Louisiana will have a substantial hit, but it has bonding authority. This gives it the ability to cover losses over a long period of time. Louisiana has approximately $100 million available to pay losses and $340 million of reinsurance. The Alabama residual market has $8.6 million in cash and $50 million in reinsurance.

Mississippi has $2.1 million in cash and $175 million in reinsurance. It appears that plans in all these states, in order to make up for their projected shortfall, may have to assess property insurance companies’ based on their market share to make up for the residual market’s shortfall.”

As for the major insurers and reinsurers, just how hard will they be hit in their wallets?

Estimates are sure to change, but a number of reinsurers and insurers released preliminary losses to their respective companies in recent weeks. (see International Newsbriefs, page N16)

PCI’s Griffin says that even three weeks after Katrina first struck, it is still too early to tell how the losses will affect specific companies.

“Many areas are still inaccessible and in some locations, adjusters are just starting the process of adjusting claims,” Griffin said. “It is also important to keep in mind that an insurers’ market share in the state may not directly correlate with its market share in the most severely affected areas. We will have to wait to see. However, while the insured losses are expected to be significant, the industry is well prepared to handle the claims.”

Carolyn Gorman, vice president of communications at the Insurance Information Institute, told Insurance Journal that despite the storm’s devastation, the industry does have the capital to meets its obligations.

“Such an event, though severe, is well within the range of what insurers plan for,” Gorman said. “Katrina will again result in billions of dollars in losses, however, reinsurers will pay a larger percentage for this storm than would normally be expected. That’s because Katrina is considered one separate event, thus primary insurers will have just one deductible to satisfy, before reinsurers begin to pay the remainder of the losses.”

When the final numbers are tabulated months from now, Katrina will likely to take her perch atop the all-time list of hurricanes to impact the industry.

“Katrina is likely to be the most costly hurricane ever to hit the insurance industry,” Gorman said. “It will be weeks, perhaps even months before the full extent of the losses are known.”