Insurance sector could ride out storm
There are a number of ways to gauge the level of destruction caused by storms like Hurricane Katrina. A common way is to assess the total insured damages left in the wake of the storm. By that measure, Katrina will likely go down as the worst natural disaster ever to strike the United States.
After Katrina was downgraded from a Category 5 hurricane (the worst) to a Category 4 storm before making landfall—and after she moved slightly east, sparing New Orleans from a direct hit—many economists lowered their original expectations for losses. Early estimates after the storm struck was that Katrina would cause around $9 billion to $16 billion in insured losses.
But after work crews began to survey the damage, including the devastation to other coastal communities in Mississippi and Alabama and to oil rigs in the Gulf of Mexico, many believe the storm could end up costing insurers $26 billion. If true, that would certainly top the $21 billion in insured losses (in inflation-adjusted dollars) caused by Hurricane Andrew in 1992, the $20 billion in damages caused by the 9/11 terrorist attacks in 2001, and the $16 billion in losses caused by the Northridge, Calif., earthquake in 1994.
Still, as big a number as that is, Katrina may not have the negative impact on the insurance sector—or insurance premiums—that Hurricane Andrew did more than a decade ago.
That's because Andrew was literally a force of nature. It caused four times as much insured damages in 1992 as the largest catastrophe up to that point.
"Katrina does not appear to have such a surprising, unique nature to it," says Merrill Lynch insurance industry analyst Jay Cohen. Indeed, even if Katrina ends up causing $26 billion in damage, that would only be about 25 percent bigger than Andrew—not four times as large.
As a result, Cohen does not expect a big impact on insurance premiums.
"While a very big event, we do not expect Katrina to have a broad positive impact on pricing other than in the local homeowners insurance markets and possibly in the property reinsurance market for that region," he says.
Analysts point out that last year's hurricane season caused a total of $20 billion to $30 billion in losses but did not have a widespread affect on pricing beyond the affected regions.
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