Katrina Chat

At a recent meeting of specialty insurance professionals the serious conversation was dominated by the impact of Katrina on the insurance business.  While there were a few “chicken little” scenarios, some of the more thoughtful comments included the following:

• Katrina insured losses will be the largest ever by a wide margin (no surprise).
• Property underwriters with a disciplined approach to their business weathered the storm in good shape.  Basically, control of aggregation and strong reinsurance programs are the key.
• The reinsurance business will take a very large hit from this.  (Berkshire estimates it will incur 3%-5% of total industry losses, see here)
• There is significant concern whether there will be adequate capacity at the 1/1 reinsurance renewals.  If this occurs, primary capacity could be significantly reduced, and some underwriters are already restricting capacity.
• No names, but many are convinced that the quite a few of the “other guys’” cat covers are inadequate.  The significance here, if true, is that some insurers’ losses will run all the way through their catastrophe reinsurance covers, and the insurers will be forced to pay losses above the cat cover limits (until they run out of surplus).  This can cause insolvency very quickly for insurers with small cat cover limits, as it did for a few after Andrew.
• At least one reinsurer has already started raising capital to replace surplus that is expected to be significantly eroded by Katrina losses.
• Flood (see here and here) is an issue of concern because there was no intention to cover flood, and the order of magnitude of the flood exposure, if they are required to cover it, is significant.
• Whether reinsurers will “follow the fortunes” if flood is covered is an open question.
• Underwriters of large and specialty property risks view this as a market opportunity, but there is no consensus on whether this will be limited to the commercial property market in hurricane exposed locations.
• Some commercial property pricing is already going up, but this appears to be limited at this time.