Insured Losses
Could Hit $26 Billion

Despite a last-minute shift away from directly hitting New Orleans and a drop in its top wind speeds, Hurricane Katrina left insurers bracing for what could be one of the costliest storms in U.S. history.

Preliminary estimates suggested that insured losses from the storm could total anywhere from $9 billion to $26 billion, generally excluding damage to offshore oil production. Hurricane Andrew in 1992, the costliest storm on record, caused $21.6 billion of insured losses in 2005 dollars; last year's Hurricane Charley ranks No. 2, at $7.7 billion.

Adjusted for inflation and development, Andrew's impact in more densely developed South Florida would cause more than $25 billion of insured losses today, according to estimates by catastrophe modeling firms. By comparison, the Sept. 11, 2001, terrorist attacks caused $35.9 billion of insured losses in 2005 dollars.

Analysts said it was too early to predict Katrina's harm to insurers and reinsurers, creating uncertainty about the extent of rate increases. The final cost hinges on the extent of damage to New Orleans, one of the most heavily built-up stretches on the Gulf Coast, said Tony Diodato, vice president for property-casualty insurance at A.M. Best Co., an insurance-rating firm in Oldwick, N.J. "There's a lot of wait and see," Mr. Diodato said.

Most insurers aren't expected to release estimates of losses from the storm for several days. Residential claims typically make up two-thirds to three-fourths of storm losses, with business claims making up the rest, said Jay Cohen, an insurance stock analyst with Merrill Lynch & Co.

In Louisiana and Mississippi, the states hardest hit by Katrina, residential- and commercial-insurance markets are dominated by big, well-known companies, including policyholder-owned State Farm Insurance Cos. and such publicly owned firms as Allstate Corp., St. Paul Travelers Cos. and American International Group Inc. For policyholders, that means the full resources of those companies are potentially available to pay their claims.

Still, the storm could hurt earnings more directly than last year's four hurricanes, which caused damage primarily in Florida. Many of Florida's highest-risk homes are covered by a state-run insurer, or by small, private-sector spinoffs; big companies there typically shield their assets by writing insurance only through isolated units that, in theory, can fail without directly harming the parent corporation. Other Gulf states also have state-run insurers of last resort, but they cover fewer homes.

With damage concentrated outside Florida, Katrina also could hit the reinsurance industry harder than last year's storms. Reinsurers take on some of the risk of paying claims in return for part of the policyholder's premium. In Florida, a state-run reinsurance pool, funded by insurers, covers as much as 90% of each participating insurer's losses above an industry total of $4.5 billion for one storm, up to $15 billion in a season. That buffers the private-sector reinsurance industry, which generally covers losses above that amount. No such mechanism exists in other Gulf states, meaning reinsurers could face bigger losses, Mr. Diodato said.

Moreover, reinsurers typically must pay out more for a single, large event than for several smaller ones, as a result of provisions in reinsurance contracts that function like deductibles. "Reinsurers, I think, are going to be hit harder than they were during Andrew," said Steve Smith, vice president of ReAdvisory, a unit of reinsurance broker R.K. Carvill & Co.

Total economic losses could be roughly double insured losses, according to analysts at Fitch Ratings, an insurance- and credit-rating firm. That is partly because residential-insurance policies typically don't cover flood damage -- potentially a significant factor in New Orleans, much of which is below sea level. Residential flood insurance is sold through a federal program.

Following major storms, disputes often erupt between insurers and policyholders over water damage, including whether losses stemmed from wind-driven rain, which is covered, or rising surface water, which typically isn't for homeowners. Businesses can purchase private flood insurance, but it is unclear how widespread this practice is in the hardest-hit states.

Another uncertainty: How insurance rates will be affected by the storm. Merrill's Mr. Cohen noted that catastrophes generally drive rates up nationwide only when unprecedented, as with the 2001 terrorist attacks, as well as with Hurricane Andrew, which resulted in losses several times greater than previous storms. Last year's storms drove up rates primarily in Florida and other coastal areas.

For New Orleans, a city heavily dependent on tourism, the possibility that authorities could seal off parts for several days or more also suggests insurers could face extensive business-interruption insurance claims. Such policies typically pay for business lost because of damage to the policyholder's insured property, or because authorities prevent access to the business because of widespread damage. Terms can be hotly contested.

Given the storm's size and strength, insurers expect claims well inland. Many insurers already have begun to mobilize thousands of claims adjusters and mobile claims offices. Allstate, based in Northbrook, Ill., for example, has 1,200 adjusters in the Gulf region who will begin processing claims as the storm recedes. State Farm, based in Bloomington, Ill., could deploy 1,100.

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