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Irene Seen as One of 10 Costliest Catastrophes in US History

Irene Adds to a Bad Year for Insurance Industry

The New York Times, Aug. 28, 2010

The total damage inflicted by Hurricane Irene may reach $7 billion by the time the storm dissipates in the coming days, making one of the insurance industry’s worst years even tougher, according to an early estimate by the Kinetic Analysis Corporation in Silver Spring, Md.

Most of the loss will very likely come from property in New York and New Jersey, according to industry experts. Although Irene had diminished to a tropical storm by the time it reached New York early on Sunday, those two states have the most valuable coastal property on the Atlantic Coast.

At $7 billion in possible losses, Irene would be among the 10 costliest catastrophes in American history, according to the Insurance Information Institute.

The most expensive disaster by far was Hurricane Katrina in 2005, which caused $45 billion worth of damage, not counting costs that were covered by the National Flood Insurance Program. The second, at about $23 billion, was the Sept. 11, 2001, terrorist attacks on the World Trade Center and Pentagon, which the institute counts as a single event. All but one of the remaining top 10 were hurricanes, ranging in cost from $22 billion for Hurricane Andrew in 1992 to $6 billion for Hurricane Rita in 2005.

Insured losses in the Carolinas from Hurricane Irene were estimated on Sunday at $200 million to $400 million by Eqecat, a company in Oakland, Calif., that models the effects of natural disasters. The company said that parts of North Carolina and Virginia had received 20 inches of rain, more than had been forecast, and that more than a million people were without power after Irene, which was ranked a Category 1 hurricane when it came ashore there.

In the Caribbean, Irene caused an estimated $500 million to $1.1 billion worth of damage, most of it in the Bahamas, where it was a Category 2 hurricane, but also in Puerto Rico, the Dominican Republic and other territories, according to AIR Worldwide, a Boston company that analyzes the cost of storm damage.

Even before the current Atlantic hurricane season started in June, American property insurers had already run through a typical year’s worth of catastrophe payouts because of an unusual string of severe natural disasters. Their losses could grow even more, because forecasters have been predicting an above-average hurricane season this year.

The A. M. Best Company, which rates the financial strength of insurers, called the level of natural disasters this year “unprecedented” in a report on the American insurance industry issued last week. The company, based in New Jersey, said disaster-related losses this year had already exceeded the total for all of 2010. It estimated the losses at $27 billion through June 30, compared with $11.9 billion in the first six months of last year and $19.6 billion for all of 2010. The company based its findings on a survey of roughly 150 insurers, which it said accounted for 80 percent of the industry.

A. M. Best said the year’s series of major disasters would hurt insurers’ earnings, but was unlikely to threaten their capital. It noted, though, that the industry would “be tested through the remainder of 2011, as budgets for catastrophe-related losses already have been exhausted.”
Moody’s Investors Service said many property and casualty insurers were still profitable in the storm-ridden second quarter of this year, but their profits often shrank compared with the second quarter of 2010, and their reserves to pay claims had diminished and would have to be rebuilt at some point. A few, with large operations in the Midwest and Southeast, swung from profits to losses, Moody’s said, including Allstate, Hartford Financial Services, Travelers and Cincinnati Financial.

Moody’s research covered only the publicly traded insurers, not mutual companies like State Farm, which has the largest share of the personal insurance market in the United States. State Farm has disclosed payouts of more than $2.5 billion through May of this year.

Some of the losses for American companies grew out of catastrophes in other countries, including the powerful earthquake and tsunami that hit Japan in March and an earthquake in New Zealand in February that was followed by floods and destructive aftershocks.

In the United States, there were blizzards in the Midwest, fires in the Southwest, severe tornadoes in the Southeast, a hailstorm in Oklahoma that did more than a billion dollars’ worth of damage and flooding along the Mississippi and other rivers. The worst losses arose from the tornadoes and hailstorms that hit in April and May, including the tornado that struck Joplin, Mo., on May 22 and the one in Tuscaloosa, Ala., on April 27.

Eqecat said tornadoes alone were costing insurers up to $18 billion so far this year, with up to $7 billion of that from just three days, April 25 through 28. Most of the claims involved damage to homes and cars, and companies that sell personal insurance are taking a bigger blow than those that sell coverage to businesses.

Eqecat said those three days were “likely the most expensive tornado outbreak ever in the United States.”

Property and casualty insurers are also having a difficult year because of low investment income, a result of the Federal Reserve’s efforts to use low interest rates to stimulate the economy. In addition, insurers have been struggling with what is known as a “soft” market, in which competition for new business is intense and companies have a hard time raising premiums enough to cover all the risks they bear. Some analysts have been wondering whether the year’s storms will be the catalyst that changes those market conditions.

“To the extent that carriers perceive greater catastrophe risk, we expect that they will manage their exposures down,” Moody’s said in a research report this month. In other words, they would charge more, underwrite more strictly or buy more reinsurance so that some of their losses would be reimbursed.

Although painful for insurers and property owners, hurricanes rarely cause more than a blip on the national economy.

The biggest categories of loss are property damage and the disruption to business. For companies that suffer both, “there obviously can be some layoffs associated with natural disasters if businesses are forced to shut down,” said James F. O’Sullivan, chief economist at MF Global.
For the broader economy, those losses tend to be offset by increase in spending from cleanup activity and rebuilding. With so many construction workers currently unemployed, rebuilding can provide short-term jobs.

With the potential for some companies to be shut down for up to a week after a hurricane hits, Allen L. Sinai, chief global economist at the consulting firm Decision Economics, said that he would most likely downgrade his third-quarter growth forecast for economic output, or gross domestic product, between a half and a full percentage point.

But, he said, “we’ll probably get most of it back” in the fourth quarter on the “rebound effect.” Mr. Sinai said that insurance payments to cover repairs after storm damage would show up as extra economic activity after the storms.

Any slowdown in the growth rate, of course, could have a further dampening effect by depressing already sluggish consumer confidence, which is hitting lows not seen since the middle of the most recent recession.

In general, said Mark Skidmore, an economist at Michigan State University who has studied the long-term economic effects of natural disasters, wealthier countries tend to be able to recover quickly and relatively efficiently because insurance steps in. Haiti is still reeling from the 2010 earthquake, Mr. Skidmore said, in large part because the “economic base was so fragile to begin with.”

Joshua Shapiro, chief United States economist at MFR Inc., warned against those who argue that disasters can ultimately spur growth as cities and businesses rebuild. Some say that such activity actually leads to growth because governments, homeowners and businesses often install new technology or other improvements when they rebuild after a disaster.

“The ultimate impact is still negative because you’re starting from a lower level of activity or assets and you’re repairing them,” Mr. Shapiro said. “If you’re looking at growth for the month or two afterward, obviously things are growing faster because it’s engendering all this activity, but you’re just trying to get back to where you were.”

If it really were true that natural disasters led to growth, he said, “if you’re in the middle of recession you just wander around blowing up buildings and that would be your path to prosperity.”

“And clearly that’s not the case,” Mr. Shapiro said. “It’s not the case with a natural disaster, either.”

Charles C. Watson Jr., president of Kinetic Analysis, said Irene hit at a time when small businesses and homeowners “can’t handle another shock to the budget.”

“Their reserves are lower than normal, insurance won’t be covering as much, government budgets are stretched, and there is a question mark as to if banks will want to loan money to repair or cover operating losses in vulnerable areas,” Mr. Watson said. “For coastal businesses dependent on tourism, losing this weekend and potentially the big Labor Day weekend due to cleanup could be devastating, given the tight margins this year.”

Mr. Watson also said Irene was causing more than the usual level of uninsured losses, which meant governments, businesses and the public would bear a bigger burden than in other natural disasters.

Much of the damage was being caused by rain-induced and coastal flooding, something private insurers seldom cover, he said. Also, insurance companies with coastal exposures have been shifting away from fixed deductibles on homeowners' insurance, and replacing them with deductibles for storm damage that move up and down with the value of a home. This change means many homeowners will have to cover more of their repair costs themselves before their insurance kicks in.