The RAA expresses its sympathy to all of those in the Gulf Coast region and offers support to the many first responders in the region. In the months ahead, untold numbers of insurance company workers will be on site assisting with economic recovery for the many citizens with insurance coverage.

Reinsurers play an important role in protecting their clients and helping to restore a damaged economy and reinsurers will be paying billions of dollars in Hurricane Katrina claims. However, it will take months and years to make a final accounting for this catastrophic event.

Hurricane Katrina Losses: Insured loss estimates from Katrina, which range from $15 billion to $60 billion, are highly speculative at this point. Insurers are still undertaking the process of assessing the damage as search and rescue took first priority. Several analysts are now focusing on estimated gross losses of $40 to $50 billion and projecting individual company losses from that target. A.M. Best has listed $30 billion in losses as reported by individual insurers. It is notable that this estimate would make this the largest insured loss ever, even greater than the projected $35 billion in September 11 losses.

Katrina caused an enormous amount of flood damage, which means that the National Flood Insurance Program may pay for a higher share of hurricane damage than otherwise would be expected. Although home insurance policies do not cover flood losses, many commercial policies do provide some flooding protection. From press reports, flood losses appear to be greatest in southern Louisiana and on the Mississippi and Alabama gulf coast due to the reported 25-foot storm surge. Lawsuits have now been filed in Louisiana and Mississippi seeking to override home insurance flood exclusions.

In addition to the large amount of protracted flooding, Katrina’s loss picture may be different from other hurricanes. Insurers are assessing damage to offshore oil platforms and environmental contamination in the greater New Orleans area. Other variables include the large number of flooded cars, the extensive damage to transportation infrastructure, the unique shut down of the greater New Orleans area, and the effect that will have on the business interruption line of insurance.

Hurricanes Rita and Wilma Losses: Initial estimates of insured losses range from $2.5 to $7 billion dollars. Very early estimates of losses for Hurricane Wilma now range from $6 billion to $10 billion. As with Katrina and Rita, it will take time for insurance adjusters to assess the damage and for the extent of individual company and aggregate industry losses.

Reinsurer Losses: For natural disaster losses, reinsurers typically pay on an aggregate basis between 25% and 30% of the gross losses. The larger the loss event, the greater the share that is passed on to reinsurers; thus, as Katrina’s loss estimates rise, the percentage share paid by reinsurers will grow substantially. It is generally reported that reinsurers paid 60% or more of the 9/11 insured losses. Analysts are now projecting that reinsurers will pay about 60% of Katrina’s insured losses. The amount reinsured depends on the market share of insurers in the region and their propensity to use reinsurance. Purchase of reinsurance is voluntary and some insurers choose to keep all such losses for their own account; other insurers have business models that rely upon reinsurance. The share of an individual insurer's loss that will be reimbursed by reinsurance is variable and dependent on that company's risk appetite and its reinsurance purchasing decisions.

Reinsurer Capital: Standard and Poor’s estimates that the global reinsurance industry had $160 billion in capital at yearend 2004. The firm estimates that if insurance industry losses total $50 billion, that reinsurers capital could decrease by 12% after consideration of earnings to date, tax offsets, dividend payments and capital raising activities. S & P estimates that reinsurers have raised $4.5 billion in capital post Katrina. The recovery from this loss level would take about three years. Fitch Ratings estimates that reinsurers could lose 4 to 8% of their capital and expects capital to be replenished within 18 months.

Abundant Reinsurance Capacity: In recent years, property catastrophe reinsurance capacity has been abundant and in fact, the 2004 Florida hurricanes did not lead to a reduction in reinsurance capacity; nor did they lead to a spike in reinsurance costs. Property catastrophe reinsurance pricing has remained stable-to-declining, with modest increases for Florida insurers. Market sources continue to assess Katrina losses, but many expect that this event will not constrain reinsurance capacity.

In the industry trade press, reinsurance brokers initially were quoted as saying they expect that reinsurance markets will remain stable and that Katrina’s effect will be to prevent prices from dropping in the soft market rather than rising. More recent analyst reports and press commentary point to the potential for broad based increases in property catastrophe reinsurance prices. Morgan Stanley analysts recently commented that reinsurers would have difficulty making broad based price increases stick.

In September and October insurers begin discussions with their individual reinsurers on pricing and terms for the big January 1 renewal season. More information will be available on the effect of Katrina on the insurance and reinsurance markets in trade press stories that will cover several major industry conferences in September and October.

Managing for Expected Losses: Hurricane Andrew and the Northridge Earthquake were paradigm-shifting events after which insurers and reinsurers reevaluated their business strategies and revised coverages, pricing and underwriting rules. Industry executives now report that Hurricane Katrina may also be a paradigm-shifting event because of the extensive protracted flooding, environmental contamination, large wind-field pattern and proportionally larger commercial lines losses. One of the important outcomes of Hurricane Andrew was the development of more robust catastrophe modeling products. Industry reliance on these improved catastrophe models has brought greater stability to reinsurance markets