Cost of Catastrophes

• The Insurance Services Office (ISO) estimates that losses from the four major hurricanes of 2004 could reach $20.4 billion. Property Claims Services projects that at least 1.7 million claims will be filed from the four Florida hurricanes in 2004. As many as 15,000 claims adjusters worked on these claims throughout the process.
• Forecaster William Gray at Colorado State University has upped his 2005 Atlantic hurricane forecast three times since December 2004 beginning with 11 named storms, then 13, then 15. Now, he says the number of named storms will be "significantly above" the long-term average of 9.6 named storms and 5.9 hurricanes.
• Property/casualty insurers are expected to pay policyholders in four states $900 million on claims for insured property losses from Hurricane Dennis, according to estimates by ISO's Property Claim Services (PCS) unit. Dennis made landfall in the US between Pensacola Beach and Navarre Beach, Florida on July 10, 2005.
• If the nation's worst tornado disaster reoccurred today, it would cause $3.5 billion in wind damage alone, according to a study by Newark, CA-based Risk Management Solutions Inc. The April 3–4, 1974 Tornado Super Outbreak produced killer tornadoes across 13 states in a single day, including the deadly Xenia tornado.
• Between 1980–2003, the population of coastal counties grew by 33 million people, or 28%. Florida grew 75%, Texas 52% and Virginia 48%. Between 2003–2008, coastal population in the Southeast region, the area most vulnerable to windstorms, is expected to grow by 1.1 million, or 8%, with the highest growth expected in the southernmost part of Florida. (2004 study by NOAA, based on US Census data)
• A study by Dr. Haresh Shah of Risk Management Solutions and Stanford University show estimates of the potential damage to Tokyo in a major earthquake are numbing. A quake similar to the one that destroyed the city in 1923 could cause as much as $4.3 trillion in total losses.

Premium trends

The destruction of the World Trade Center has changed the concept of risk beyond all previous levels. The impact of this event is the costliest US disaster on record. It also affected more types of insurance than any other disaster, making both insurers and policyholders rethink future exposures. Click here for the chart showing 9/11 losses.

This event led Congress to pass the Terrorism Risk Insurance Act (TRIA) in November 2002. TRIA, which expires at the end of 2005, provides a federal backstop for future terrorist acts, making it easier for insurers to calculate their maximum losses for such a catastrophe and thus to price the coverage. As of July 2005, Congress was in the process of considering legislation to renew the Act.

An insurance company’s ability to underwrite insurance policies is tied to its capital and the risk of the properties it insures. The 2004 hurricane season is a costly example of the greatest threat to insurers and policyholders. Natural disasters are becoming more prevalent, especially in the hurricane-prone coast states. Some of Florida’s insurers have sought rate hikes between 5–20% to prepare for future risks. Insurers are not permitted to recoup on past losses, but can request rate hikes based on future risks of insuring properties in Florida.

Insurance and disaster-prone areas

A catastrophe, in insurance terms, is an event that causes more than $25 million in insured property damage. Catastrophes can be natural disasters such as tornadoes or floods, as well as man-made ones such as the July 2005 London transit bombings.

Following Hurricane Andrew in 1992, insurers began to reassess the likelihood of losses using computer models to pinpoint areas prone to risk and by type of catastrophe(s). Many insurers now assess risk based on meteorological data combined with their own exposure data. The meteorological data shows the probability of a natural disaster occurring in a particular region and the insurers’ exposure data provides information regarding how many policyholders could potentially be affected and to what extent.

To help them better withstand the financial strain of a mega-disaster, insurance companies in catastrophe-vulnerable states may now use percentage deductibles on homeowners policies as opposed to a dollar deductible. Windstorm and hail deductibles, which may be mandatory in some coastal areas, vary from 1–15% of the home’s insured value. In some states, homeowners can opt for a traditional dollar deductible at a higher premium.

On the last day of Florida’s 2005 legislative session, lawmakers agreed on final provisions in a comprehensive property insurance bill. Among the proposals most important to the insurance industry is the restructuring of the Florida Hurricane Catastrophe Fund, the state-run reinsurance pool that helps offset high hurricane damage losses, so that insurers can tap into it earlier. To trigger payments from the fund, industry losses for the first two storms must reach $4.5 billion, the same figure as in 2004, but only $1.5 billion for subsequent storms. Without the new law, the retention or deductible amount would have been the same for every storm and would have risen to nearly $5 billion in 2005 as the number and value of homes in the state increased. In addition, the law reverses a 2004 court ruling for 2005 claims that allowed homeowners to collect the full amount of coverage on both flood and homeowners policies when a home was destroyed by the combined force of hurricane winds and a storm surge. Under the new law, homeowners insurers will pay only their share of the loss.

Under the new Florida law, consumers have two more hurricane deductible options, 5 and 10%, in addition to the current 2% and flat rate of $500.

In a December 2004 special session, Florida lawmakers eliminated multiple hurricane deductibles and reimbursed homeowners who paid more than one deductible during the 2004 hurricane season. Starting with the 2005 season, homeowners will be subject to a single hurricane deductible per year. The $150 million for reimbursements came from the Florida Hurricane Catastrophe Fund, which insurers have been paying into since 1993 for reinsurance coverage. To offset these costs, all Florida policyholders will see a 0.5% increase in homeowners premiums for the next five years to repay the catastrophe reinsurance fund for the money borrowed and 1–3% rate increase to compensate insurers for additional losses they will have to pay in some hurricane seasons because of the elimination of multiple deductibles.

Insurance companies writing business in California must offer earthquake insurance to their homeowner insurance policyholders. The policy can either be underwritten by the California Earthquake Authority, if the insurer is a participant in the pool, or through the company itself. It’s currently estimated that 15% of California’s homeowners are insured against earthquakes.

In Colorado, insurers have increased deductibles for wind and hail. In some hail-prone parts of Texas, Kansas, Kentucky and other Midwestern states, in addition to deductible increases, some companies provide coverage for roofs on a depreciated basis rather than replacing an aging, damaged roof with a new one to help keep premiums affordable.

Special pools, known as Beach and Windstorm Plans, ensure the availability of protection for beach property in seven states along the Gulf and Atlantic coasts.

Recent US catastrophe results and claims trends

US insured catastrophe losses for 2004 are estimated at a record $27.5 billion, exceeding 2001 losses ($26.5 billion) that included the terrorist attacks. Policyholders in 42 states and Puerto Rico filed nearly 3.35 million claims. 2003 are estimated at $12.89 billion. There were 22 catastrophic events in 2004, 21 in 2003 and 25 in 2002.

Over 80% of the insured losses in 2004 were from the five hurricanes making landfall along the Atlantic and Gulf coasts. The last time back-to-back hurricanes struck the US was in 1999, the year of hurricanes Bret, Dennis, Floyd, Irene and Lenny.

Through the first half of 2005, 12 catastrophic events have resulted in estimated losses $3.055 billion, according the Property Claim Services (PCS) a unit of the Insurance Services Offices, Inc. (ISO). For information regarding losses for the first half of 2005, go to www.iso.com/press_releases/2005/07_06_05.html

Click here for the chart detailing 2004 US catastrophes.

Ohio catastrophe results

After a relatively quiet 2001 from a catastrophe standpoint, Ohio experienced a few sizeable years in terms of insured losses related to natural disasters. PCS estimates the Buckeye state’s 2001 insured catastrophes totaled about $35 million. That rose to $275 million in 2002 and $320 million in 2003. 2004 totals are estimated at $255 million. Flooding, hail, tornadoes and wind were Ohio’s major perils in recent years. Click here for a chart detailing Ohio’s 2004 catastrophes.

Two of Ohio’s major weather-related events occurring in 2004 were the subject of claims surveys by the Ohio Insurance Institute:

• A series of May storms affecting parts of the Buckeye state produced at least $167 million in insured losses and over 44,000 claims. The most prominent storms affected the Canton area (May 17), Newark and northeast Ohio (May 21), and the greater Dayton area (May 26-27). For more information, go to www.ohioinsurance.org/newsroom/newsroom_full.asp?id=204.
• Preliminary findings from the December holiday snow and ice storm that caused major power outages and treacherous travel across the Buckeye state caused at least $85 million in insured losses. At least 27,100 claims have been filed from this winter storm. For more information, go to www.ohioinsurance.org/newsroom/newsroom_full.asp?id=251.

Paying for catastrophes

The price of an insurance policy reflects the costs of paying claims covered by that policy, as well as an insurance company’s costs. Insurers buy reinsurance to protect their assets, just as individuals and businesses buy insurance to protect theirs. Reinsurance is sold in layers, reaching into the millions—even billions—to protect insurers from the possibility of a devastating disaster.

1992’s Hurricane Andrew initially raised the bar as far as how devastating a mega-catastrophe can be. The attacks of September 11 raised it even further.

Terrorism coverage is no longer offered as a standard coverage to commercial policyholders as a result of the 9/11 attacks. With a shortage of catastrophe reinsurance, especially for large national insurance companies, some insurers are turning to capital markets to cover claims at higher levels once reinsurance has been exhausted. While the number of transactions involving capital markets is still relatively small, some observers expect catastrophe risk security products to develop over the next decade.

Government protection

The terrorism legislation passed by the US Congress in November 2002 provides federal funds for terrorism damage after insurers have reached a certain dollar threshold of losses, based on maximums for each commercial lines insurance company and a maximum for the industry as a whole, up to $100 million per year for the total program, including insurance company payments. The Terrorism Risk Insurance Act (TRIA) sunsets at year-end 2005 and does not cover personal lines or reinsurance.

At the end of June 2005, the US Treasury released its long-awaited report on TRIA, finding that the program had been effective in terms of the purpose for which it was designed, namely to provide a transitional period during which insurers could develop enhanced capacity to write terrorism risk insurance coverage. But, the report says, it should not be renewed, at least in its current form. While the program is in effect it slows the development of additional private market capacity to provide terrorism insurance coverage, the report says. Some observers believe that the bombing of London transit systems in July 2005 may influence lawmakers’ decision on TRIA.

Similar protection programs exist in other countries. New Zealand, Japan, France, and the Netherlands have programs in place. New Zealand’s covers damages caused by earthquakes, floods, tsunamis, landslides, volcanic eruptions and hydrothermal activity.

Great Britain has a program that provides terrorist coverage. Spain also has a government-sponsored reinsurance pool, which covers both terrorist acts and natural disasters such as floods, but not business interruption coverage. In Germany the government provides coverage for terrorist damage but will not accept unlimited liability.

Sources: Property Claim Services (PCS), a unit of the Insurance Services Office, Inc. Excerpts from “Issues Update,” Insurance Information Institute.

Source: Property Claim Services, a unit of Insurance Services Offices, Inc., as of 7/05

Note: This and the previous chart only include the most severe catastrophes. Quarterly estimate totals include additional events as noted.

Sources: “Issues Update,” Insurance Information Institute, and Property Claim Services, a unit of Insurance Services Offices, Inc. as of 7/05

Since January 1, 1964, excluding insurance, federally declared disasters in Ohio have cost nearly $473 million. (Ohio Emergency Management Agency)

¹ Adjusted to 2004 dollars by the Insurance Information Institute
² Property coverage only

Sources: ISO; Insurance Information Institute Fact Book 2005

2004 was the fourth-hottest year on record, confirming a trend that began in 1990s. October 2004 was the warmest October ever recorded. (The World Meteorological Organization, an agency of the United Nations)

¹ As of 12/04. Dollar amounts and percentages do not add to total due to rounding.
² Includes $1.1 billion due to a December 2004 federal jury decision that the World Trade Center losses resulted from two separate attacks which is subject to appeal

Source: Insurance Information Institute, Fact Book 2005

Half of the 10 costliest terrorist attacks between 1970–2005, in terms of insured property losses, occurred in the U.K., according to Erwann Michel-Kerjan, a researcher at the Risk Management and Decision Processes Center at the University of Pennsylvania's Wharton School. (The Wall Street Journal, 7/8/05)

Source: Insurance Services Office, Inc.

Over the 20-year period, 1984–2003, tornado losses made up 33.7% of total catastrophe losses, followed by hurricanes (27.1%), terrorism (11.0%), winter storms (10.6%), earthquakes (9.4%), wind/hail/flood (4.0%), and fire (3.3%). Civil disorders, water damage and utility services disruption combined represented less than 1%. (Insurance Information Institute)

Source: Swiss Re

¹ Property and business interruption losses, excluding life and liability losses
² Adjusted to 2004 dollars by Swiss Re

Note: Loss data shown here may differ from figures shown elsewhere for the same event due to differences in the date of publication, the geographical area covered and other criteria used by organizations collecting the data.
Sources: Swiss Re, sigma, No. 1/05. Insured losses for natural catastrophes in the US and the Sept.11 terrorist attack from ISO. Reprinted from Information Institute Fact Book 2005

Source: Institute for Business and Home Safety