Katrina’s Waves

The initial impressions of Hurricane Katrina were television shots of devastating winds and pounding storm surges. The images confirmed what many had predicted – a severe Category 4 or a Category 5 hurricane but nothing that the Southeastern U.S. and Caribbean had not experienced before. At first, the perspective seemed to be: “We’ve lived through this before, we’ll survive.”

However, the unfolding human tragedy of Katrina left an indelible imprint on many of us. The haunting images of corpses floating through water, “American refugees” lined up outside sports domes, a chaotic, almost-barbaric situation characterized by rampant looting and the martial law are not supposed to depict a civilized country like our neighbors to the south.

The slow response of the U.S. federal government and the blaring headlines of “national disgrace” will resonate for a long time. So will the well-documented plight of an urban sub-class of mostly black and poor victims left to fend for themselves for too long.

Despite this despair, there is an urge, or even the need, to rebuild. It’s the other side of human nature – the need to recover what was so special and unique about the Mississippi delta and the town of Mardi Gras and the French Quarter. Here the insurance industry will play a vital role.

In view of the damage estimates being tossed around and continuously revised – US$25-35 billion in insured losses and as much as US$100 billion in total economic losses – it is clear that property and casualty insurers will be on the front lines of recovery. According to catastrophe modeling firm Risk Management Solutions, the cost of interrupted economic activity caused by flooding had exceeded $100 million per day in early September. Reinsurers’ reports of their share of damages are trickling in. One thing is for sure: this will be the costliest natural disaster to occur in the U.S., with the economic losses surely rivaling any worldwide catastrophes including 9/11.

How the industry responds to this disaster will go a long way towards improving – or further deteriorating – its public perception. If insurers take an overly hard line to claims adjusting, they will be portrayed as callous corporations impervious to the needs of thousands of people and businesses. If, however, they assume a fair but realistic approach, their role could be highlighted as a critical cog in the renewal process for the hardest hit parts of the southern U.S.

After an extremely long and difficult hard market over the past three years, it is refreshing for the insurance industry to be associated with words like “rebuilding,” “recovery” and “renewal.” It is an opportunity that should not be squandered. However, it’s quite likely that disputes will arise about whether the actual hurricane was one event or two separate events (with landfall in Florida and the Gulf Coast) and whether damage was caused by wind (which insurers would cover) or flooding (which would be covered in some cases by a national flood program).

The larger question – and quite a different “elephant in the room” than the race issue identified by various media in the coverage of the aftermath – is the impact of Katrina on a fragile global insurance industry recovery. Worldwide catastrophic events clearly have an impact on the Canadian market, particularly at the reinsurance level. This is particularly true when one considers that the softening of the p&c market cycle had largely ridden the waves of robust commercial and personal property lines of business. With reinsurers and primary insurers hit by the hurricane on many different levels, you can be sure that the free ride is over.

Will the timing of this one event wipe out the gains in stability made by insurance company’s post 2001, or will it be safely absorbed by a well-capitalized global industry? Will consumers see another round of sharp rate increases or will insurers be able to weather the storm of claims from Katrina and view it as a “one-in-a-hundred year” event (a phrase that itself seems to hold less meaning with every large natural disaster)?

How the industry as a whole responds to the crisis will be revealing and fascinating to watch over the next few months.

Steve Wilson, Senior Publisher

steve@canadianunderwriter.ca