Katrina, the «big one»

Hurricane Katrina, which lashed the south of the United States on August 29, 2005, is regarded as the most devastating of all natural disasters ever suffered by the country in the course of its history. According to the late estimates, the extent of the damage is two to three times as great as that of the major events such as the cyclone Andrews in 1992 (20 billion USD) and the 9/11/01 World Trade Center attacks (32.4 billion USD).

Chaos and grief

Photo credit: US Gov. / NOAA, Mark Moran, Phil Eastman & Dave DemersAn area of 235 000 Km² in lands, that is, almost the whole of Great Britain, or half the area of France as well as a 40 to 50 km of coast line have been devastated.
In the Louisiana state, where the city of New Orleans has been submerged by polluted water following the failure of sea walls of the Mississippi, most of the infrastructure, networks, industrial buildings and dwellings have been destroyed. A thousand people are believed to have perished, while tens of thousands are left homeless, desperately seeking refuge in neighbouring states, thus unveiling before the whole world another facet to the United States.

About 50 off-shore oil platforms and wells have been severely damaged in the Gulf of Mexico. Many refineries, factories, shipyards, yachts, boats, casino and fishing ships have been wrecked.
The interruption of all economic and commercial activities for several weeks will bring about severe effects on the US economy.

An unprecedented disaster

Photo credit: US Gov. / FEMA FEMA disaster declarations in the aftermath of Hurricane Katrina

Both insurers and reinsurers have begun assessing their losses. The cost of economic losses caused by Katrina continues to be revised upwards. The late estimates have reported damages worth 200 billion USD, 50 to 60 billion USD of which to be incurred by insurers. Katrina, alone, will cost more dearly than the four cyclones combined (Jeanne, Frances, Ivan and Charley), which occurred in the 2004 season.

The 5 most affected insurance companies in Louisiana The 5 most affected reinsurance companies
  in millions USD
Personal lines*Industrial risks
State farm: 34,7%
St Paul Travelers: 13,5%
Allstate: 20,8%
State Farm: 12,9%
Lousiana Farm: 6%
Zurich: 10,6%
Farmers: 4,1%
Allstate: 6,1%
St Paul Travelers: 3,9%
Hannover: 5,8%
CompaniesEstimated losses
Berkshire Hathaway
3 000
2 550
Swiss Re
1 400
1 200
XL Capital
1 050
* Householder insurance risks Source: L’Argus de l’assurance

The Katrina fallout

The scale of the disaster has triggered big concerns among business professionals who fear a market upheaval. Nevertheless, they can attribute a positive side to the event which consists in slowing down the fall of the premium rates noticed since 2003 on the London market.

  • Pricing: Katrina has shown that hurricane risk in the United States is underpriced. The event will have an immediate impact on the rise of premiums rates of the risks affected by the disaster.
     Forecasts of rate increases
    Oil risks (Gulf of Mexico)
    35 to 50%
    Property catastrophic risks (worldwide)
    10 to 15%
    Other property risks
    3 to 5%
    Third party liabilities
    Non affected
  • Pricing patterns: Reinsurers find it hard to come up with a correct modelling of the natural catastrophic risks. Due to its magnitude, Katrina has uncovered the failures and shortcomings of all the quotations patterns designed by insurers.
  • Capacity: Katrina has clearly proved that the reinsurance market's problem is structural: A problem of cyclone capacity in some areas of the world, especially in the Gulf of Mexico and the Caribbean which alone account for 57% of the total losses due to natural catastrophes for the last twenty years.
    Katrina has decreased reinsurance capacity by 15%, which represents a loss of 15 billion USD, while the primary insurance market in the USA is in search for additional capacity following the cyclone.
    Cost of the major natural catastrophes 1987-2005*
    in billions USD
    Cyclones in the USA and the Caribbean
    Storms in Europe
    Typhoons in Japan
    Earthquakes in California
    Earthquakes in Japan
    216,3 100%
    Source: Sigma-Swiss Re * Estimations at 21-09-2005
  • Capitalization: Katrina alone has triggered the loss of at least 25 billion USD in capital to the entire market. Some existing companies are bound to recapitalize if they are to survive. Among the most affected companies, there are:
    • Montpelier Re: - 40% of the capital
    • Platinium: - 39% of the capital
    • PX Re: - 39% of the capital
  • Retrocession: Naturally volatile, retrocession prices will significantly go up in 2006. To protect themselves, some companies are going to yield a significant part of their 2006 premiums to their reinsurers. The Hannover Re 2005 retrocession premium is valued at 25% of the company's equities. Companies have got three means at their disposal to protect their capital from hurricanes and natural catastrophes:
    • Abstain from underwriting this type of risks, especially in the USA, in Europe and in Japan (see table above).
    • Be endowed with a consistent capital: as is the case of Munich Re and Swiss Re.
    • Buy retrocession on a volatile and expensive market.
  • Companies' rating: Being highly contested in these recent years, rating agencies have reacted immediately following the hurricane Katrina by putting some insurers and reinsurers under surveillance (10 by S&P and 15 by AM. Best). Some names are on both lists, it is the case of Montpelier Re, PX Re, Allmerica Financial.
Natural catastrophes since 1990 in the world having cost more than 400 million USD

in billions USD Source: Standard & Poor’s, Münchener Rück, ARF * Estimations

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