Weathering the storm

Hurricane Katrina could be called an industry nightmare. Some insurers were still reeling from the effects of the Asian tsunamis and last year’s four hurricanes. Yet when Katrina struck in late August, she forced insurers to action. The hurricane dislodged offshore oil rigs, flattened homes, flooded New Orleans and left hundreds dead. Thousands of businesses were damaged and residents were displaced. The flooding has prevented adjusters from working in the most severely damaged areas. Yet while insurers strive to deal with the aftermath, many wonder whether they are risking it all-especially because they’re just in the midst of hurricane season.

Hurricane Katrina made landfall on Aug. 29 about 60 miles southeast of New Orleans near Buras, La. A Category 4 storm, she pummeled Louisiana, Mississippi and Alabama with maximum sustained winds reaching 145 miles per hour.

“Katrina was very large for a Category 4 hurricane,” said Dr. Jayanta Guin, vice president of research and modeling for AIR Worldwide Corp., a Boston-based risk modeling firm. “Katrina’s hurricane strength winds extended more than 120 miles from the center of the storm, from near Baton Rouge, La., to east of Mobile, Ala., and over 200 miles inland.”

The disaster was further complicated the following day when New Orleans’ levee broke and water flooded the city. “The tidal wave was about 28 feet plus [there were] waves of around six feet,” described Angelyn Trueutel, CPA and owner of Trueutel Insurance Agency Inc., Bay St. Louis, Miss., who survived the storm. Upon surveying her home, she said “everywhere you walk, there are piles of debris 10 feet high.

“It looks like a giant picked up our house and turned it upside down and shook it. We had three feet of standing water in our sunken living room. There is mud on everything,” she wrote in an e-mail on Sept. 1, 2005.

According to Guin, of the more than $500 billion of insured property in Louisiana, more than 35 percent is in coastal counties that were affected by Katrina. In Mississippi and Alabama, more than 10 percent of the total value of insured properties is in coastal counties.

Risk Management Solutions, Newark, Calif., estimates insured losses from Hurricane Katrina to be $40 billion to $60 billion, of which $15 billion to $25 billion are related to the Great New Orleans Flood. Total economic losses are expected to exceed $125 billion.

A storm surge

Those economic and insured losses make Katrina one of the worst disasters in U.S. history, topping the record-setting $15.5 billion in insured losses from Hurricane Andrew in 1992. Yet there could be more to come.

“The tropics are only going to get busier as we enter the peak of the season,” said Brig. Gen. David L Johnson, director of the National Oceanic and Atmospheric Administration (NOAA) National Weather Service.

The average Atlantic hurricane season runs from June 1 through Nov. 30, and produces 10 named storms in which six become hurricanes. Of those hurricanes, on average two are major storms with winds of at least 111 miles per hour.

In 2005, NOAA was on target in predicting the magnitude of Katrina. The administration expects there will be an additional 11 to 14 tropical storms from August through November, with seven to nine becoming hurricanes. Of those seven, three to five are expected become major hurricanes.

“This may well be one of the most active Atlantic hurricane seasons on record, and will be the ninth above-normal Atlantic hurricane season in the last eleven years,” Johnson said.

Additionally, NOAA predicts above-normal hurricane seasons could continue for another decade or longer. “Warmer-than-normal sea-surface temperatures and low wind shear are among the culprits behind these stronger and more numerous storms,” said Gerry Bell, lead meteorologist on NOAA’s Atlantic Hurricane Seasonal Outlook. “That confluence of optimal ocean and atmosphere conditions has been known to produce increased tropical storm activity in multi-decadal (approximately 20-30-year) cycles,” according to NOAA.

If climate and insurance trends continue, availability and affordability of insurance will be at a greater risk for homeowners and businesses, noted a new report by the Ceres Investor Coalition, Boston. Hurricane Katrina is a poignant reminder that U.S. insurers, government and consumers are at enormous risk from escalating losses from hurricanes and other natural disasters, the report stated.

Prepared for losses?

According to the Ceres report, insured and total property losses are rising faster than premiums, population or economic growth globally in the United States. Even after correcting for inflation, weather-related catastrophe losses in the U.S. property/casualty sector have grown from a few billion dollars per year in the 1970s to an average of $15 billion per year in the past decade, punctuated by three peaks of more than $25 billion per year and a record high in 2004 that included $30 billion in hurricane losses.

President George W. Bush declared Louisiana, Mississippi and Alabama disaster areas, making residents eligible for federal assistance if they don’t have insurance or damages exceed their insurance coverage.

Additionally, Hurricane Katrina’s insurance and economic loss predictions are likely to rise. Already, RMS and other risk modeling companies have revised their loss predictions multiple times since the Hurricane.

Laurie Johnson, RMS vice president, said economic losses from business interruption and displacement of residents are dependent on the duration of the flooding and result of the contamination. “This is the first urban flood that has affected such a vast and industrialized region,” she said. “Without benchmarks, authorities have little experience to inform them.”

According to the Army Corps of Engineers, the floodwaters in New Orleans are receding at a rate of four to six inches per day, but approximately 60 percent of the city remains under water. The Corps predicts it could take months to completely drain the water and fully assess structural damage, as well as soil and groundwater contamination.

Too much at risk

Such pressures could push some insurers over the financial edge. Rising losses have already had a visible effect on insurers’ profitability. U.S. catastrophic losses have grown 10 times faster than premiums since 1971, and that doesn’t include the losses caused by small weather with under $25 million in insured losses, the Ceres report stated.

Most industry insiders say it’s too soon to accurately predict, which, if any, insurers will become insolvent. A loss of Katrina’s magnitude “always has the potential to stress or even render insolvent some insurers,” said Fitch Ratings, Chicago. Smallest insurers with exposure concentrated in the affected areas face the greatest risk of insolvency. “However, it is still too early to tell if this is the case and, if so, who is at risk of financial distress,” the company said.

Fitch does not expect insolvencies among the larger insurers, although some could face rating downgrades. The insurance industry will be assisted by the National Flood Insurance Program, nevertheless, Fitch indicated there are reasons for concern.

First, the New Orleans levee break complicated the settlement process and increased the economic cost of the storm. Losses from looting are generally not included in estimates of loss models. Losses also have tendency to grow in size the longer they remain unsettled, and the extensive flooding has delayed adjusting and settlements. Furthermore, there may be intense public and political pressure to settle claims, even those that are “ambiguous” whether damage is due to wind or flood. There is also a high risk of disputes over coverage. And the environmental loss could generate liability claims that are unusual for a natural catastrophe, Fitch said.

Despite these concerns of higher than initially predicted losses, “right now, insolvency doesn’t appear as if it will be a problem,” said Joseph Annotti, senior vice president of public affairs for the Property Casualty Insurers Association of America, Des Plaines, Ill. “Most insurers have reinsurance in place.”

Standard & Poor’s and Moody’s Investors Service, both based in New York, said their outlooks for the global reinsurance industry were stable. “Despite the scale of Hurricane Katrina, its impact on ratings is expected to be confined to a handful of reinsurers. This is due to the strength of reinsurers’ underlying operating performance and balance sheets,” said Simon Marshall, Standard & Poor’s analyst.

However, both companies said there may be a weakness of reserves and a possible major fall in earnings due to the effects of the hurricane. Some analysts fear that reinsurers will be forced to raise new capital if claims from Katrina damage their balance sheets. Katrina could wipe out a whole year’s earnings, S&P added.

Insurers persevere

Yet with no option except to deal with the losses, insurance agents and adjusters are working the affected areas as quickly as they can. Tens of thousands of insurance adjusters from around the country have begun working claims in areas accessible to them, according to the Insurance Information Institute. Many insurers also have dispatched specially equipped catastrophe vehicles or set up temporary staging areas in neighboring communities to help expedite the claims process.

However, insurers and agents are dealing with many of the same disruptions confronting the victims-lack of power, phone service, accommodations and fuel shortages.

“We are desperately trying to get an alternate office location established,” Treutel Insurance Agency’s Angelyn Treutel wrote in a Sept. 4, 2005 e-mail to Applied Systems Inc., her insurance automation software producer. “The water was four feet in [the] office building-most of our computers were destroyed I am planning to return tomorrow to attempt to retrieve our hard drives from the server and my office computer in an attempt to expedite getting our database back.

Applied Systems has created an online listing of more than 40 insurance agencies offering assistance to other agencies that have been displaced or disabled because of the hurricane.

Additionally, because of the slow speed in which water is being pumped out of New Orleans, adjusters are having trouble accessing the hardest hit areas. Typically, adjusters tackle areas that are the most severely damaged-the eye of the storm damage-then work their way outward, explained Bob Warner, claims manager for Louisiana Farm Bureau Insurance Companies, Baton Rouge, La. But because of the flooding in New Orleans, adjusters are working in reverse, addressing the least damaged properties first.

“The adjuster force is maxed out now with the resources required for this one,” Warner said. “We’re still trying to get more folks in from other Farm Bureaus to help each other out. The sheer number of claims in Mississippi is stretching everyone to the max. If another one hits now that’s a thought I put to the back of my mind and shudder at the thought.”

Others are more optimistic.

“Right now actually, a lot of adjusters could handle more claims because they have been kept so far from so many policyholders’ properties [because they can’t get into New Orleans],” said Carolyn Gorman, vice president of III. “It could be weeks before insurance adjusters get to examine those [flooded] properties. Katrina will probably be the worst disaster ever handled, but the industry has the strength to pay the claims and all the covered losses.”

Tiffany O’Shea, director of public affairs for the American Insurance Association, Washington, agrees. “I think the adjusters are so highly trained that they could get called in to deal with multiple storms,” she said. “I can’t speak for all individual companies, but I think there would be enough reserves around the country of people to move on from this storm or pull in additional reserves if another disaster hits. “But hopefully it won’t come to that.”

Topics Catastrophe Carriers USA Profit Loss Claims Windstorm Louisiana Flood Reinsurance Mississippi Alabama Hurricane