Cost of Catastrophes

• Hurricane forecaster Prof. William Gray predicts that there’s a 71% probability that a major hurricane will strike the US mainland in 2004. If so, this would be the first such storm in five years.

• It’s estimated that over 84 million live in coastal zones from the Gulf of Mexico to New England. According to the Institute for Home Business and Home Safety (IBHS), 4,500 move into Florida every week.

• Between 1993–2002 US insurers paid out $1.09 for every $1.00 they took in. In Ohio it was $1.14 for every dollar.

• There’s a nearly 2-in-3 chance that the San Francisco Bay area will suffer a major earthquake (6.7 or greater) by 2032, according the US Geological Survey’s Working Group on California Earthquake probabilities.

Premium trends

The destruction of the World Trade Center has changed the concept of risk beyond all previous levels. The impact of this event, which is still not fully known, 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.

An insurance company’s ability to underwrite insurance policies is tied to its capital and the risk of the properties it insures. With less capital available, and as much as $40.2 billion in insured property/casualty (P/C) claims to cover as a result of the 9/11 attacks, insurance costs for some lines continue to increase. Part of the reason is because of the current reinsurance market. The World Trade Center disaster will likely cost reinsurers more than $20 billion, putting this coverage in short supply and at higher rates for high-risk areas of the country. There have, however, been signs that the current hard market may begin to soften.

In January 2004 the Council of Insurance Agents and Brokers (CIAB) reported that fourth quarter 2003 results suggest that insurance pricing may be the rebound. One-third of all commercial P/C accounts experienced insurance premiums that either held steady or dropped during the last three months of 2003, according to a CIAB survey of 117 large P/C commercial brokers.

The survey showed that when commercial P/C accounts experienced premium increases, the hikes ranged from 1–10%, regardless of account size. On average, premiums for small accounts increased by about 5%, and medium account premiums were up an average of 6%. The average premium increase for large accounts was 4%.

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 9/11 attacks.

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 17 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.

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.

2002–2003 US catastrophe results and claims trends

US insured catastrophe losses for 2003 are estimated at $12.89 billion (as of 1/04) and $5.85 billion in 2002 (as of 2/03). Although there were fewer catastrophic events in 2003 (21 in 2003 and 25 in 2002) insured losses were up 120%.

According to Property Claim Services (PCS), a unit of Insurance Services Offices, Inc., 1.8 million catastrophe-related claims were filed in 2002 and 2.6 million were filed in 2003. There were 1.5 million catastrophe-related claims filed in 2001 and 1.4 million in 2000. 1999 had the third highest number of claims reported for a single year with 3.3 million. It was exceeded only by 1996 when 3.9 million claims were filed and 1998 with 3.5 million claims. Click here for charts detailing 2002–2003 US catastrophes.

2002–2003 Ohio catastrophe results

After a relatively quiet 2001 from a catastrophe standpoint, Ohio had two 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. Flooding, hail, tornadoes and wind were the major perils reported in both years. Click here for a chart detailing Ohio’s 2002–2003 catastrophes.

Of note is a possible discrepancy in Ohio’s 2003 insured catastrophic losses based on an Easter hail storm that hit Central Ohio on April 20. Initial losses were reported at $51.7 million, based on an Ohio Insurance Institute survey of its members in May 2003. A resurvey in April 2004 found that insured losses were over 4.5 times greater, increasing to nearly $241 million. Claims more than tripled to over 38,219.

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 federal terrorism reinsurance program sunsets at year-end 2005 and does not cover personal lines or reinsurance.

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 “Insurance Issues Update,” Insurance Information Institute, Ruth Gastel, editor.

The top 10 cities worldwide, based on their risk to natural disasters and potential for insured losses are: 1) Tokyo 2) San Francisco 3) Los Angeles 4) Osaka-Kobe-Kyoto 5) Miami 6) New York City 7) Hong Kong 8) Manila-Quezon 9) London 10) Paris (Munich Re)

Source: Property Claim Services, a unit of Insurance Services Offices, Inc., as of 4/04

Year-to-date claims as of 2/03: 1.8 million.
Source: See information under 2003 US Major Catastrophes chart that follows.

Over the 20-year period 1982–2001, tornado losses made up 30.7% of total US catastrophe losses, followed by hurricanes (28.2%), terrorism (12.6%), winter storms (10.9%), earthquakes (10.1%) and wind/hail/flood losses (4.3%). (Insurance Information Institute)

Note: This and the previous chart only include the most severe catastrophes. Quarterly estimate totals include additional events as noted.
Sources: Insurance Information Institute, “Insurance Issues Update,” edited by Ruth Gastel and Property Claim Services, a unit of Insurance Services Offices, Inc.

Source: Insurance Services Office, Inc. and Insurance Information Institute with excepts from Fact Book 2004

The average homeowners insurance premium increased 44% in the past nine years, from $420 in 1994 to $603 in 2003. The US coastal counties, from Texas to Maine contain about half the country’s population. Shoreline population has increased sixfold in the past 20 years. (Insurance Information Institute and Institute for Business & Home Safety)

Sources: ¹ Disaster Insurance Information Office estimates as of 6/5/02, from Insurance Information Institute. Excludes life claims.
² Morgan Stanley, from Insurance Information Institute, Fact Book 2004

Source: Insurance Services Office, Inc.

50,000 died in natural catastrophes worldwide in 2003, nearly five times as many as in 2002. The number of catastrophes recorded in both 2002 and 2003 was about 700. (Munich Re)

Source: Munich Re

Source: Institute for Business and Home Safety