Best: Most Insurers Will Meet Hurricane Katrina’s Financial Commitments

September 1, 2005

In response to Hurricane Katrina, A.M. Best Co. has begun to aggregate public and private information in order to assess the financial impact it will have on the global property/casualty insurance and reinsurance industry.

A.M. Best expects that virtually all rated companies will be able to meet their commitments, despite the projected magnitude of the potential losses, although a few individual companies’ ratings may be lowered.

In addition to industry aggregate information, A.M. Best continues to be aware of Hurricane Katrina’s impact on specific companies, and is focused initially on those organizations with the largest market share exposure relative to their surplus. As part of A.M. Best’s analysis, each individual company is evaluated based on its ability to withstand the impact from a major catastrophic event. Further, those companies with significant gross catastrophe exposure are tested for their ability to absorb additional catastrophe losses.

While awaiting information from the affected companies, A.M. Best is comparing the companies’ modeled catastrophe exposure to the potential market share exposure and evaluating the reinsurance protection. The accuracy of the catastrophe modeling is an important factor in determining the need for rating action, as those companies with accurate loss exposure projections will likely have losses that are manageable within their capital base. While A.M. Best realizes that actual loss estimates will be difficult for companies to produce at this time, analysts are requesting preliminary modeled loss estimates and/or ranges from these companies.

Hurricane Katrina is expected to be one of the most costly catastrophes in U.S. history. Several issues likely to impact insurance and reinsurance companies is the 72 hour “occurrence” period used in reinsurance contracts, which means primary insurers will have 2 retentions, energy (oil & petroleum) losses, the magnitude of losses derived from commercial properties located along the coastal region, major infrastructure damages, and business interruption losses.

A significant amount of potential flood claims are likely to be borne by the National Flood Insurance Program which is not covered under voluntary homeowners’ policies; however, commercial insurers typically provide flood coverage, and this component of the losses may be greater than expected. Additionally, there is potential for coverage disputes based on the origins the water damage.

Reinsurance will also be a major factor, with the impact on primary companies from Hurricane Katrina expected to be different than the impact of the four major hurricanes in 2004. Reinsurance policies for commercial coverages often exclude flood damages, which could leave more losses to be retained by primary carriers. However, the reinsurance market is expected to absorb a greater portion of losses from Katrina than it did from the 2004 storms because most catastrophe reinsurance programs are established to address severe loss better than the frequency of storms in 2004.

Additionally, only a minimal portion of the losses from Katrina will be covered by the public reinsurance facility, the Florida Hurricane Catastrophe Fund. However there are certain public programs that will respond to these losses in other states.

Over the next few weeks, A.M. Best will be evaluating the impact of Hurricane Katrina in greater detail as additional information becomes available.

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