Cost of Catastrophes
- Based on 51 years of statistical data through November 2001,
hurricane forecaster Prof. William Gray predicts above-average
hurricane activity for 2002. The likelihood of a hit to the US
coastline is 86%. The average for the last century was 52%.
- Over 68 million people live in hurricane-vulnerable coastal
areas of the US, a 31% increase since 1970. 55% of the US population
live within 50 miles of the east or west coast.
- A major earthquake measuring 8.2 or higher in San Francisco
could cause as much as $84 billion in damage.
- Since 1990, the number of tornadoes occurring in the US exceeded
1,000 annually. In the three preceding decades, only one year
exceeded the 1,000-mark—1973.
The destruction of the World Trade Center has changed the concept
of risk beyond all previous levels. The impact of this event, at
its minimum, is more than three times that of Hurricane Andrew,
which had been 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.
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 billion in insured
P/C claims to cover as a result of the 9/11 attacks, insurance costs
for many lines are rising. Part of the reason is because of the
current reinsurance market. Reinsurers are bearing the brunt of
major claims payments associated with the attack. In addition, reinsurers
say they will no longer cover future terrorist acts because it’s
impossible to price the risk. Some terrorist insurance coverage
is available but at a substantial premium.
According to a study released in April 2002 by the Council of Insurance
Agents and Brokers, the hardening of the commercial lines market
is causing premium increases to continue six months after the attacks.
Limits are reported to be dropping, and some lines such as construction,
transportation and manufacturing are finding it difficult to get
insurance at all. Risk exposures are also being sharply restricted
beyond terrorism. The survey of 157 insurance companies found that
for the first quarter 2002, the majority of commercial accounts
saw insurance premium increases in the 10–30% range. Nearly
a third of large accounts experienced a 30–50% premium hike.
Following Hurricane Andrew in 1992, insurers began to reassess
the likelihood of losses using computer models to pinpoint areas
prone to risk and by the type of catastrophe(s). To help them better
withstand the financial strain of a mega-disaster, insurance companies
now require policyholders living in natural disaster-prone regions
of the country to assume a greater share of the risk through higher
deductibles. With the onset of stronger building code enforcement,
the availability of disaster-resistant building materials and other
loss prevention measures, insurance companies are hopeful that future
catastrophic losses can be reduced.
A catastrophe, in insurance terms, is an event that causes more
than $25 million in insured property damage and affects multiple
insurers. Catastrophes can be natural disasters such as tornadoes
or floods, as well as man-made ones such as the 9/11 attacks.
2001 US catastrophe results
US insured catastrophe losses for 2001 are estimated at $24 billion
(as of March 2002), as compared to year-end figures of $4.3 billion
in 2000 and $8.3 billion in 1999. Although the number of catastrophic
events were at the lowest point since 1969, 2001 insured loss totals
are the highest in history. Property loss totals for the World Trade
Center attack are not finalized.
As indicated in the chart “2001
Major US Catastrophes,” there were a total of 20 catastrophes
for the year. There were 24 catastrophes reported in 2000, 27 in
1999, 37 in 1998 and 25 separate events reported in 1997.
According to Property Claim Services (PCS), 1.5 million catastrophe-related
claims were filed in 2001 (as of 3/02), compared to 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.
2001 Ohio catastrophe results
Ohio was spared of any sizeable natural disaster during 2001. Click
here for Ohio’s catastrophe record. PCS estimates the Buckeye
state’s 2001 insured catastrophes totaled about $35 million.
Of note is a possible discrepancy in Ohio’s insured catastrophe
losses for 2001. A rare, but costly hailstorm in the Dayton-Kettering
area on April 9, 2001 caused at least $70 million in insured losses,
according to an Ohio Insurance Institute (OII) survey of its members.
Losses from the golf ball-sized hail that reigned over the Dayton
suburb for several minutes resulted in insurance losses exceeding
the $45 million of damage caused by the September 20, 2000 Xenia
tornado. The OII survey found that at least 27,600 claims were filed
from the hailstorm.
Ohio’s 2000 insured losses totaled $102 million for six events.
1999 insured losses totaled $375 million, with over 135,000 claims
filed. Ohio’s 1998 insured losses totaled $165 million and
$130 million in 1997.
Deductibles and availability in disaster-prone areas
Insurers in 17 catastrophe-vulnerable states may now use percentage
deductibles on homeowners insurance policies rather than a dollar
deductible. Percentage deductibles for windstorm and hail losses
vary from 1–5% of the home’s insured value. This program
varies by state and insurer, and the deductible may only apply on
a regional basis. Some companies provide supplemental policies to
cover the deductible, while others also provide a dollar-amount
deductible policy 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. At year-end 2000, only 17% of California’s homeowners
were insured against earthquakes.
To address disaster-prone areas of Texas and insurance availability
problems, insurance companies can offer deductibles up to 5% of
the home’s insured value for claims associated with wind, hurricanes
and wind-driven rain.
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. Reinsurance companies have seen risks
grow dramatically beyond the $8 billion pre-Andrew estimates.
Terrorism coverage is no longer offered as a standard coverage
to commercial policyholders as a result of the September 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.
The future of catastrophe protection
At close of publishing Congress was working on legislation that
would make the federal government the reinsurer of last resort for
major terrorist attacks. As of January 2002 the two houses of Congress
had not agreed on a plan.
Such catastrophe programs exist in other countries. New Zealand,
Japan, France, and the Netherlands have such programs in place.
New Zealand’s, funded from a levy place on all fire insurance
policies, covers damages caused by earthquakes, floods, tsunamis,
landslides, volcanic eruptions and hydrothermal activity.
Great Britain has a program that provides terrorist insurance coverage.
The government formed a mutual reinsurance pool for such coverage
in 1993 following acts of terrorism by the Irish Republican Army.
Insurance companies that are members of the pool sell coverage to
policyholders at rates set by Pool Re, which vary according to which
of four zones the property is located.
Spain also has a government-sponsored reinsurance pool which covers
both terrorist acts and natural disasters such as floods, but not
business interruption coverage. Private insurers may offer coverage
but are still required to make payments to the pool. Property rates
are established by the pool.
Sources: Property Claim Services (PCS), a unit of
the Insurance Services Office, Inc. Excerpts from “Insurance
Issues Update,” Insurance Information Institute, Ruth Gastel,
editor
 |
Ohio has had more than 120 mostly minor
earthquakes in the past 200 years.
(Ohio Seismic Network) |
Source: Property Claim Services, a unit of Insurance
Services Offices, Inc., as of 5/02
Note: This chart only includes the most severe catastrophes.
Quarterly estimate totals include additional events as noted.
|
More than 50% of the Fortune 1000 companies
might not be well prepared to recover from a major disruption
to their top earnings driver, and less than 25% might have adequate
contingency plans. These are the findings of the Protecting
Value survey conducted by FM Global, a commercial property insurer.
Nearly 200 CFOs, treasurers and risk managers participated in
the study. |
Sources: Property and business interruption
insurance estimates from New York Department of Insurance as
of 3/26/02, remainder of loss estimates from Swiss Re as of
3/13/02 |
Source: Insurance Services Office, Inc., as of 3/02
Source: Insurance Services Office, Inc.
|
3 of the 10 costliest US catastrophes
on record occurred in 2001 with estimated insured P/C losses
as of March 2002 totaling $21 billion. |
Source: Munich Re, as of 12/28/01
Sources: US Geological Survey, FEMA,
Uniform Building Codes, Council of State Governments
|
There were about 700 natural catastrophes
worldwide in 2001, well below the record-setting previous year
when 850 were reported. Insured losses were 53% higher in 2001
than the $7.5 billion in insured worldwide losses reported in
2000.
(Munich Re) |
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