Reinsurers weigh in on Katrina’s cost

Despite the severity of loses incurred due to Katrina, it is expected that both insurance and reinsurance companies will fulfill their policyholder commitments with little detriment to individual company ratings. The first 72 hours after Katrina hit, however, caused a major ripple in the reinsurance market as reinsurance contracts are ultimately responsible not only for major infrastructure damages, but also business interruption losses.

Reinsurers are also expected to absorb a great portion of losses related to flood damages, even though reinsurance policies often exclude flood damages for commercial coverages. Only a minimal portion of the losses incurred as a result of Katrina will be covered by the public reinsurance facility, the Florida Hurricane Catastrophe Fund.

The Swiss Reinsurance Company announced that based on its preliminary estimate, it expects its claims related to Hurricane Katrina to be in the range US$500 million before tax.

Swiss Re expects Hurricane Katrina to cost the insurance industry in the region of US$20 billion, making it the most costly hurricane aside from hurricane Andrew in 1992, when insurance claims reached US$22 billion (indexed to 2005). Based on preliminary estimates, Swiss Re expects its claims to be around US$500 million. Due to the complexity of damages caused by both the storm and subsequent flooding, estimates have a more than usual degree of uncertainty.

Munich Reinsurance Co. said its losses from Hurricane Katrina will likely reach up to US$490 million.

The Insurance Information Institute (III), meanwhile, predicts the insurance industry payout could range from U.S. $12 billion to U.S. $25 billion. The figures compare with Hurricane Andrew’s insured damage total of an inflation-adjusted U.S. $20.9 billion. Andrew is the largest ever-insured loss caused by a natural disaster, according to the III.

Hannover Re is the first reinsurer to indicate that the cost of Hurricane Katrina will likely lower its profits with full year net profits, potentially only reaching the 2004 level of US$386 million – a 30% decrease from its previously forecasted target.

Hannover Re estimates its claims cost will reach US$21 billion. Hannover also indicated the storm might improve some parts of its business in the coming year. The German reinsurer says it expects that prices will now harden as people recognize the importance of natural catastrophe and marine reinsurance.