Risk Management

Hurricane Frances Spares Insurers

With estimated insurance downgraded from $35 billion to $6 billion, premium hikes don’t seem likely—yet.
Stephen TaubSeptember 8, 2004

Hurricane Frances will probably not rack up as
large an insurance bill as initially feared. With premium hikes typically following big losses, that’s good news for most insurance-buying companies not affected by the devastating storm.

At first, news reports citing estimates from Risk Management
Solutions Inc. projected total insurance claims stemming from the weekend hurricane at around $35 billion. But Risk Management cut its estimate
to a high of $6 billion, according to Bloomberg.

Meanwhile, Germany’s Munich Re, the world’s
largest reinsurer, said the overall insured damage
caused by Hurricane Frances so far is between $5
billion and $15 billion, according to the Associated
Press.

“We can’t make any statements yet regarding our
exposure to the hurricane and its possible
consequences on full-year net profit,” spokesman
Rainer Kueppers told reporters. However, he did predict that the damage would not
be as bad as Hurricane Charley, which is estimated at
roughly $7.4 billion.

“It’s a painful quarter for insurers, but
something we can manage,” Robert Hartwig, chief
economist of the New York- based Insurance Information
Institute, told Bloomberg.

In contrast, Hurricane Andrew generated $20.3 billion of
inflation-adjusted losses in 1992, making it the most
expensive in U.S. history and a turning point for the industry, Bloomberg pointed
out.

Following Andrew, insurers took aggressive
steps to greatly reduce their exposure to a major
catastrophe. They tripled and quadruped Florida homeowner rates
and set a separate deductible for hurricane damage,
according to Bloomberg.

Hannover Re, the world’s fifth-biggest
reinsurer, and Scor SA, France’s biggest reinsurer reported on Monday that they weren’t concerned about losses from Frances, according to Bloomberg.

Meanwhile, some insurers know their overall
exposures are at limited because they can tap a
catastrophe fund created in 1993 that begins to pick
up losses after they reach $4.5 billion, according to
Bloomberg.

“The insurance industry has finally started to
learn,” Bill Pieroni, head of International Business
Machines Corp.’s insurance consultancy practice, told the wire service. “If this same storm had hit before 1992, we’d be seeing very different [insured loss] numbers.”

But insured losses—and insurance pricing— could mount if Hurricane Ivan strikes southern Florida. Acknowledging the changes Ivan’s possible arrival could wreak on insurers’ loss picture from the relatively benign effects of Frances, Chris Winans, an analyst at Lehman Brothers Holdings Inc., told Bloomberg, “All bets are off if Ivan comes through.”

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