S&P Analyzes Potential Impact of Q3 Hurricanes; Questions Catastrophe Models

September 8, 2004

Standard & Poor’s Ratings Services has issued a prelimlinary report on the series of hurricanes, notably Frances and Charley, which have struck the U.S.

S&P indicated: “Although it’s still too early to establish a definitive view of the overall magnitude of property/casualty losses associated with Hurricane Frances, it does appear that the combined effects of Hurricanes Frances and Charley will produce insured losses well below those associated with Hurricane Andrew in 1992.”

It also observed that a greater proportion of the damages caused by Frances would likely “be attributed to flooding than was the case with Charley, a risk that is born to some extent by federal flood insurance and serving therefore to mitigate somewhat the exposure of the private sector.

“Among those losses that will be covered by private sector insurance we expect to see proportionately more commercial lines losses, particularly of a casualty nature (such as business interruption), than was the case with Hurricane Charley. If the gross losses of primary homeowners’ writers should exceed the reinsurance coverage provided by the Florida Hurricane Catastrophe Fund, individual companies’ reinsurance programs would be affected.”

S&P observed that the reinsurers in turn “might rethink their approach to modeling catastrophes to give greater weight to the frequency of such events than before.” It cited four issues that will ultimately influence its “view of the effects of these developments on the global insurance industry.”

These were: 1) the magnitude of losses associated with the typhoon and earthquakes that struck Japan in the past few days, 2) the ultimate effect of another major storm in a hurricane season that has several weeks to run, 3) the effect on market pricing of all of these events, and 4) the political ramifications of the public’s perception of the performance of the insurance industry in the wake of such catastrophes.”

S&P said it would “continue to monitor the development of events with respect to the global and domestic insurance industry, as well as the effects it might have on individual members of that industry.” It added that “although we are continuing to evaluate the effects on the ratings on individual insurers, at this point no rating actions are being taken.”

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