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Gustav Impact Limited But Losses from Moderate Catastrophes Add Up

September 2, 2008

Gustav may not wallop the property/casualty insurance industry the way Katrina did but there is still concern in insurance and reinsurance circles over the continued pile-up of catastrophe losses.

Standard & Poor’s Ratings Services notes that early reports indicate that estimated insured losses from Gustav will likely be $3 billion to $6 billion onshore and $1 billion to $4 billion offshore. Standard & Poor’s said it does not believe that the magnitude of this event is such that there will be much influence on the creditworthiness of the industry as a whole, and few, if any, rating changes will result.

However, Gustav is just the latest— and the most severe– catastrophe in a year of an unusually high frequency of modest-sized catastrophes (and large individual commercial claims). This has been a contributing factor in the revision of the outlooks on some companies, reflecting adverse turns in their performance as a result of an accumulation of exposures to these modest catastrophes, according to S&P.

According to S&P, it is possible that further accumulated losses from small catastrophes– or a substantial loss from one of the currently developing tropical storms– could have a more material adverse effect on ratings.

If this were to come to pass, S&P contends that compared with 2005, when Katrina, Rita, and Wilma struck, the effects would be more pronounced on primary companies and less on reinsurers because of the generally greater retention of property risk by primary companies over the last year or so. This will be especially true if the year’s pattern of greater frequency and less severity of catastrophes continues.

The rating agency said the magnitude of Gustav appears to be insufficient to have a material effect on pricing trends in either the primary or reinsurance markets.

A large number of exteme weather events pummeled the United States in the first half of the year, and worldwide 2008 may go down in history as a year with one of the highest number of natural catastrophe victims, industry analysts noted recently.

There have never been so many tornadoes recorded in the first six months of a year, analysts say. Heavy rain and hail and subsequent flooding in Iowa and other Midwest states also caused billion-dollar losses, which also had a significant impact on the insurance industry. The overall loss caused by the floods on the Mississippi and elsewhere is likely to be around $10 billion, with an insured loss in the upper three-digit million dollar range.

Robert Hartwig, chief analyst for the Insurance Information Institute, says losses are running well ahead of 2006 and 2007 figures. Hartwig reported in a webinar hosted by Munich Re and I.I.I. that “2008 catastrophe losses already exceed all of 2007 losses and are on track to overtake 2006.” 2005 was by far the worst year every for insured catastrophe losses, he added. T

Worldwide there were about 400 natural catastrophes through the end of June 2008. The largest number of events ever recorded in one year was 960 in 2007. Overall losses so far in 2008 total about $50 billion, according to the presenters. The insured losses are substantial and above the average of the last 10 years.

The earthquake in the Chinese province of Sichuan, the cyclone in Myanmar, and other natural catastrophes between January and June claimed the lives of more than 150,000 people. That is a higher number of deaths than in the full years since 2004, the year of the tsunami in South Asia.

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