Storm damage predictors see bigger risks ahead
Reuters News Service, Feb 28, 2006
NEW YORK (Reuters) - After failing to predict how costly Hurricane
Katrina would be last year, companies forecasting catastrophes are now saying U.S. damage from large storms will rise as much as 60 percent in some regions in coming years.
This boost in anticipated hurricane losses could also push the cost of
insuring coastal areas much higher and have serious implications for the insurance industry.
"Some companies (buying insurance) may be stunned by how much rates will go up," said James Auden, an insurance analyst with Fitch Ratings. Insurers are also seeking to raise premiums for home owners.
Storm modeler Risk Management Solutions (RMS) told Reuters hurricanes could cause 50 percent more damage in the future.
Eqecat, another catastrophe forecaster, expects the storm loss potential for the Atlantic and Gulf coasts to rise by 20 percent to 30 percent and costs in Florida could surge 50 percent to 60 percent.
As expectations for losses rise, insurers will have to retain more
capital to pay for them, said industry analysts.
Rating agencies Standard & Poor's and A.M. Best Co. have already
signaled that they will cut insurers' creditworthiness if they don't
have enough cash to keep up with potential storm damage.
Last week ratings agencies downgraded reinsurer PXRE Group Ltd. after it underestimated 2005 hurricane losses by 71 percent.
PXRE shares have lost more than half their value on the New York
Stock Exchange since the announcement. Reinsurers provide backup coverage to regular property and casualty carriers.
Higher water temperatures in the Northern Hemisphere are expected to increase the number and size of storms for the next 10 or 15 years. At the same time, increased development of coastal areas is magnifying the damage when storms hit.
"We are increasing our view of the likelihood of severe hurricanes and
the severity of the loss in the event of those hurricanes," said Hemant
Shah, chief executive of RMS in a phone interview.
Tom Larsen, senior vice president of Eqecat, said: "There's no guarantee of a catastrophic event, but it is twice as risky as it was a year ago," he said.
In the 2005 hurricane season a triple battering by Hurricanes Katrina,
Rita and Wilma caused more than $80 billion in insured losses along the coast from Florida to Texas.
Catastrophe forecasters such as RMS, Eqecat and AIR Worldwide were widely criticized for not accurately estimating the losses and making predictions that turned out to be far too low.
Hurricane Katrina, which caused the inundation of New Orleans, was the nation's most costly disaster ever, with more than $40 billion of
AIR Worldwide said it was refining its U.S. hurricane model but wasn't
making any fundamental changes at this time. "Insured losses will
continue to rise as the number and value of insured properties in
vulnerable coastal areas continues to rise," said Michael Gannon, an AIR spokesman.