A Year of Varied Catastrophes

Hurricane Irene soaked the Northeastern U.S. with five to 15 inches of rain dropped over a 24 -36 hour period, said David Vallee, a hydrologist with the National Weather Service.  Prior to making landfall, the expected insured losses for this event were estimated to be around $10 billion.  Analysts and insurance executives have suggested a catastrophe above $15 billion could bring about structural changes to the insurance market due to an already weakened market over the past 3 years.

Most of the damage caused by Irene is from flooding which is not covered by private insurers.  These damages will have to be absorbed by the property owners, U.S. relief efforts, and the National Flood Insurance Program (NFIP).  

Now that the storm has subsided, the expected insured losses are estimated around $3 to $6 billion according to AIR Worldwide.  This brings the annual average industry losses for 2011 to $21 to $24 billion.  The average industry losses in a normal year range from $15 to $20 billion, says Robert Litan, an industry expert and senior fellow at the Brookings Institution.  With the current year and hurricane season only half over, it seems likely total losses from the year could far exceed the normal.

Another potential stressor to the current insurance market is the increased variety of types and locations of catastrophes.  Irene caused damage throughout the Northeastern U.S. even though hurricanes typically damage the Southern U.S and the Caribbean.  So far this year there have also been insured losses from ice storms, tornadoes, and an earthquake in Japan.  And, even though it may not have been as destructive, there was even an earthquake in Virginia.

A look at the catastrophes of 2011 brings about several questions:

• Would an overall increase of $15 billion in the cumulative insured losses for a year run the risk of insurance market changes?
• Does the potential of a greater variety of catastrophes imply that changes are necessary for the insurance market or is 2011 merely an outlier?
• Should one catastrophe of $15 billion bring about structural changes to the insurance market? 
• Will the shifting of the flood burden away from insurance companies benefit the insurance markets or will these losses still cause an impact?

 Let us know what you think.