Insured losses from Ike could top $25bn
This year's hurricane season is shaping up to rival the losses caused during 2005 season when hurricane Katrina hit, Deloitte, the business advisory firm has warned.
Some estimates of insured losses from hurricane Ike are as high as $25bn depending on where it makes landfall and whether it intensifies. The National Hurricane Centre expects Hurricane Ike to intensify and make landfall as a Category 3 hurricane with winds approaching 115 mph. However, questions remain about whether insurers and reinsurers have improved their exposure management enough after hurricanes Katrina, Rita and Wilma, Deloitte said.
Lis Gibson, insurance partner at Deloitte, said: "The devastation wreaked by Hurricane Katrina in 2005 exposed some major gaps in the way that insurance companies assess their risks and exposures. Most models failed to allow properly for the sharp increase in repair costs after a major event - so-called 'demand surge'. Having learnt from this and revised their modelling techniques and the way they underwrite business, insurers and reinsurers should be less exposed to future hurricane related surprises. However, with the last two years experiencing low levels of hurricane losses, this is yet to be tested."
GIbson said: "Hurricane losses are notoriously difficult to estimate for insurers and reinsurers. There are so many factors, in particular the storm's path and strength, as well as the individual exposures to each insurer. Insurers and reinsurers need to think about how to address the implications of climate change on their book as well as how they implement better processes for estimating their losses when the big one does hit.
"Traditionally, major catastrophes resulting in heavy insurance losses have led to a hardening of rates in the market, which in turn have made the catastrophe insurance business attractive to new capital. It is our view that Hurricanes Fay, Gustav and Ike are still not large enough to drive a change in the market rates; it would take 2008 turning into a repeat of 2005, with a further 1 or 2 major hurricanes in populous areas and total losses of at least $30-50bn in order for the market to change direction away from the current softening. The usually expected hasty influx of new capital will likely be impeded by the credit crunch. Established insurers and reinsurers will struggle to rebuild their balance sheets if they are particularly hit by a catastrophe, while there may be less capital available for new insurers."
