Munich Re Analyzes Katrina/Rita Impact; Insured Loss Around $40 Billion

September 28, 2005

Munich Re has issued a report on the impact of Hurricanes Katrina and Rita on the insurance industry. The world’s largest reinsurer said it “estimates total insured market losses at up to US$ 40 billion,” and has raised its own exposure to around 650 million euros ($782 million) after tax. Earlier estimates had put total insured losses for Katrina alone at $15 to $20 billion and 400 million euros ($481 million) respectively.

Nikolaus von Bomhard, Chairman of the Board of Management, admitted “the natural hazard events to date have cost substantially more than the amount anticipated for the first nine months of this year.” He remained optimistic, however, that Munich Re could still reach its target of 12 percent return on equity – with two caveats: 1) that the acquisition of HVB by UniCredit is completed in 2005; and 2) “that in the remaining three months of the business year, there are no exceptional developments as regards major losses or on the capital market.”

The bulletin noted: “As the full extent of the devastation caused by Hurricane Katrina has gradually emerged, natural catastrophe risk management specialists and other companies have revised their loss estimates upwards. Experts from Munich Re and American Re have now also concluded and evaluated a loss inspection of the hurricane-affected region. On the basis of this information, Munich Re now puts the overall insured market loss for Katrina at up to US$ 30 billion.”

That estimate, however, doesn’t include “the flood and storm-surge losses covered under the National Flood Insurance Program (NFIP).” Munich Re also pointed out that there are “still significant uncertainties regarding coverage issues and thus also about the actual loss burdens facing the insurance industry, with substantial differences between the highest and lowest loss estimates.” The controversy over “wind vs. flood” is part of the problem. There’s also a potential dispute between reinsurers and primary carriers, if the carriers pay claims that aren’t covered in their reinsurance treaties.

The bulletin concluded that at this stage “it is only possible to make general assumptions about the potential loss burden for the Munich Re Group from Katrina.” Based on the $30 billion estimate, Munich Re said Group losses could be anywhere between 1.1 billion euros ($1.32 billion) gross or around 500 million euros ($602 million) “after retrocessions and taxes.” However it added, “in the case of a higher insured market loss, which other institutions estimate at up to US$ 60 billion, there could be a gross loss burden of some 1.3 billion euros [$1.564 billion] and a net burden (after retrocessions and taxes) of just under 650 million euros [$782 million].”

Concerning Hurricane Rita’s added impact, Munich Re also observed: “This event, too, involves a complex loss situation with extensive flood damage, including fresh levee breaches in New Orleans.” The reinsurer gave preliminary estimates of insured market losses at between $5 and $10 billion, and Group losses at up to 230 million euros ($276.6 million) gross and 150 million euros ($180 million) after tax.

For the industry’s future the last paragraph in the announcement is perhaps the most significant. “Catastrophes on the scale of Katrina and Rita can occur on virtually all continents. The upcoming round of renewals in reinsurance business must take account of the rising loss trends and greater risk potentials. Substantially higher prices are necessary to continue covering natural hazard risks in the future,” Munich Re concluded.

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