Though early indications suggest Hurricane Ida, which made landfall on August 29 – the 16th anniversary of Hurricane Katrina – is unlikely to cause damage on the same catastrophic scale as Katrina did in 2005, the major risk for reinsurers is that more storms are likely this hurricane season, in a repeat of events in 2005 and 2017.
Though the force of the wind has eased as Ida has moved inland, wind and rain remain a major threat. New Orleans and more than 1 million households and businesses in Louisiana and Mississippi don't currently have power. Ida's winds may have exceeded Katrina's, which caused devastating damage, but the extent was smaller, and the storm surge hasn't reached the same levels. That increases the likelihood that New Orleans strengthened flood defences should hold, unlike 2005 when most of the city was inundated.
The economic damage from Katrina was estimated to cost more than $160 billion in current terms. Insurance companies paid $41 billion on 1.7 million claims in the U.S. and another $8 billion for damage to offshore-energy facilities in the Gulf of Mexico. These losses, together with $16.3 billion in publicly insured losses to FEMA's National Flood Insurance Program, brought Katrina’s total insured loss to more than $65 billion. Accounting for inflation, this would be equivalent to almost $86 billion today, according to research by the Swiss Re Institute.
With the National Oceanic and Atmospheric Administration warning that conditions favour an above-average hurricane season, the risk to reinsurers is a repeat of the frequency of severe storms seen in 2005. Hurricane Katrina was not the only major hurricane that year. Hurricane Rita made landfall as a Category 3 in Texas on September 24th that year, while Wilma, the 12th hurricane of the season and 21st named tropical storm, crossed the gulf from the Yucatan Peninsula to make a second landfall October 24th in Florida.
At the time, the storms were estimated to have cost Munich Re almost €2.2 billion after retrocession, with €330 million from Wilma, more than €250 million from Rita and €1.6 billion from Katrina. Swiss Re estimated claims from Rita and Wilma at $750 million and from Hurricane Katrina at $1.2 billion.
Charles Graham, Bloomberg Intelligence Senior Industry Analyst, said: “Hurricane Ida will be bringing reinsurers a sense of déjà vu, with North Atlantic hurricane activity being the biggest event risk for reinsurers' exposure currently.
“However, there are strong reasons to believe Hurricane Ida may not cause loss on the same scale as Katrina in 2005: the New Orleans' flood-protection program has been substantially upgraded in a $14.6 billion project completed in 2011 and Louisiana has adopted new codes to reduce the vulnerability of buildings and the likelihood of wind damage.
“For capital requirement purposes, reinsurers model their exposure based on peak scenarios for a return period of 200 years under both Solvency II and Swiss Solvency Test rules. This can be compared with total risk capital or eligible own funds. The exposures modelled on this basis are significantly larger than any historic loss experience. Munich Re's €6.7 billion exposure compares with €2.2 billion of claims from the three hurricanes in 2005. In 2017, hurricanes Harvey, Irma and Maria cost about €2.7 billion, net of retrocession.”
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