2005 Insurance Reference Manual

Personal Insurance Federation of California Insurance Reference Book

THE TOPIC: Catastrophes/Tsunami's

Insurance Information Institute
January 2005

The term "catastrophe" in the property insurance industry denotes a natural or man-made disaster that is unusually severe and that affects many insurers and policyholders. An event is designated a catastrophe when claims are expected to reach a certain dollar threshold, currently set at $25 million.

Before the 2004 hurricane season, the 9/11 terrorist attacks ranked as the most costly U.S. catastrophe in terms of property damage alone at $18.8 billion - more when liability claims are included. The insured losses caused by the four hurricanes that struck Florida and other East and Gulf coast states in 2004 is estimated at $21.6 billion, exceeding 9/11 property damage. The 2004 hurricane season resulted in more than two million claims, far more than the 750,000 claims filed after Hurricane Andrew in 1992 which is the industry's single most costly natural disaster to date.

The 9/11 terrorist attacks cost insurers about $31.7 billion in total, including liability and life insurance claims. The attacks which affected more kinds of insurance and more commercial policyholders than any other disaster, led Congress to pass the Terrorism Risk Insurance Act (TRIA) in November 2002. TRIA, which expires at the end of 2005, provides a federal backstop for future terrorist acts, making it easier for insurers to calculate their maximum losses for such a catastrophe and thus to price the coverage. Congress is considering legislation to renew the Act.

Until the 2004 hurricane season, the enormity of the attack overshadowed what is still the greatest threat to insurers and their policyholders: natural disasters. With higher than average hurricane seasons forecast for the next decade or so, Florida will have to devise a way to manage the negative impact of its greatest asset, its weather.

The typical homeowners insurance policy covers damage from a fire, windstorms, hail, riots and explosions - as well as other types of loss such as theft and the cost of living elsewhere while the structure is being repaired or rebuilt after being damaged. Commercial property insurance policies generally cover the same causes of loss with some variation, depending on the coverages selected. Flood and earthquake damage are excluded under homeowners policies - separate policies are available--but are covered under the comprehensive portion of the standard auto policy.

Over the 20-year period, 1984 to 2003, tornado losses made up 33.7 percent of total catastrophe losses, followed by hurricanes (27.1 percent), terrorism (11.0 percent), winter storms (10.6 percent), earthquakes (9.4 percent), wind/hail/flood (4.0 percent), and fire (3.3 percent). Civil disorders, water damage and utility services disruption combined represented less than 1 percent.

RECENT DEVELOPMENTS

Catastrophe Losses: Insured losses from the tsunami that was triggered by a magnitude 9.0 earthquake under the Indian Ocean are likely to be modest compared with the enormity of the human and economic losses. Huge walls of water destroyed coastal communities in at least half a dozen countries across South-East Asia. However, a large portion of property losses may be uninsured, depending on the country, because the non-life insurance industry in most of these countries is not well developed. In Indonesia, for example, just $8 per capita was spent on non-life insurance in 2003 compared with $1,980 per capita in the United States. Some U.S. insurers may suffer losses on policies issued to multinational companies. Since tourists are among the dead and missing, there are likely to be life insurance and travel/accident claims. The International Underwriting Association suggested in January that insured losses would be between $5 billion and $10 billion. Standard $ Poor's, the rating agency, also predicted that losses would be less than $10 billion. So far, more than 150,000 people are reported to have lost their lives in the disaster.
In the United States, insured catastrophe losses for the third quarter 2004 are estimated at $21.6 billion, the industry's worst third quarter ever for property losses, according to ISO's Property Claim Services unit (PCS). The previous worst was 2001 at $19.15 billion which included $18.8 billion in property damage and related coverages such a business interruption from the Sept. 11 terrorist attack.
In December, a federal grand jury found that the destruction of the World Trade Center complex was the result of two separate attacks and therefore two claims rather than one. If this finding is allowed to stand on appeal, the $18.8 billion in property damage would increase to $19.9 billion. The ruling would only apply to 9 of the insurers providing coverage. Liability, aviation, workers compensation, life and health insurance losses were not included in this total. The insured loss figure for 9/11 property damage was revised by ISO in March 2004 from $20.3 billion.
Catastrophe losses for the first nine months of 2004 now stand at $24.7 billion, the second worst nine-month period for catastrophe losses since 2001 when insurers paid out $26.1 billion from four catastrophic events, or $27.2 billion if the most recent World Trade Center ruling is allowed to stand. By contrast, catastrophe losses for the same period in 2003 were $10.2 billion.

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