GE Insurance Solutions: Are Insurers Prepared for the Perfect Storm?

February 23, 2006

While increased frequency of hurricanes is nothing new in historical terms, the enormous growth in coastal population and development is dramatically increasing the potential for insured losses, according to a new paper from GE Insurance Solutions.

“Demographic trends in Florida and other coastal locations as well as the likelihood of increased frequency and severity of storms should remind the (insurance) industry of the growing exposures it will continue to face. The cost of hurricanes will rise — sooner or later surpassing even those of Hurricane Katrina,” says the paper entitled “Coastal Warning: The Rising Costs of Hurricane Frequency and Severity.”

Kenneth Slack, senior underwriter, Global Property Catastrophe Reinsurance, and Larry Spoolstra, chief underwriting officer for North America and Asia Pacific P&C Reinsurance, at GE Insurance Solutions co-authored the paper.

The authors say there’s a perception that Hurricane Katrina created an insured loss that was unforeseen. They note, however, that it was well within the expected range of events anticipated by the insurance industry.

According to Slack and Spoolstra, the industry is well capitalized and is able to withstand monster storms and earthquakes with insured price tags in the range of $60 billion to $120 billion. However, they say there’s a danger that numerous events could occur within a 12-month period and place a cumulative strain on capital, leaving some insurance companies without reinsurance protection.

To protect their bottom lines, these same insurers “might have been prompted to buy fresh catastrophe cover from a reinsurance market that had its own losses,” the paper says. “The industry would have found itself in a period of massive demand and limited (insurance) capacity.”

The paper questioned whether the industry’s capital providers would continue to maintain sufficient levels of support going forward if a heavy natural catastrophe season occurred during the same year as an unexpected loss, such as the Sept. 11, 2001, terrorist attacks.

Given the rising catastrophic loss trends, “it is vital for the industry to keep a perspective on the high level of risk it faces,” the paper says.

To read “Coastal Warning: The Rising Costs of Hurricane Frequency and Severity” go to 060213_warn.htm. (Due to its length, this URL may need to be copied/pasted into your Internet browser’s address field. Remove the extra space if one exists.)

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