Hurricane Katrina: Insurance Losses and National Capacities for Financing Disaster Risk

Publication Date: September 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Business

Type:

Abstract:

On August 29, 2005, Hurricane Katrina made landfall on the Gulf of Mexico coast with high velocity winds, storm surge, heavy rain, flooding, coastal erosion, hail, and tornadoes. The storm caused deaths, injuries, property and infrastructure damage, economic loss, and human suffering to the coastal region of Louisiana, Mississippi, and Alabama. Private insurer losses from Hurricane Katrina for damaged, destroyed, or flooded homes and businesses, and for offshore oil and gas platforms that were either damaged, lost or missing and presumed sunk in the Gulf of Mexico, are estimated to be in the range of $40 to $60 billion. This amount would make Katrina the costliest insured loss from a single event in U.S. history, exceeding Hurricane Andrew (1992) and the terrorist attacks of September 11, 2001. Total economic losses, including insured and uninsured property and flood damages are expected to exceed $200 billion.

In the aftermath of Katrina, policy makers, disaster experts, and insurance companies have expressed concerns about the financial costs and challenges of recovering from Hurricane Katrina. Further, they note the potential vulnerability of the insurance industry to a future mega-catastrophic event, and raise questions about what role, if any, the federal government should play in financing catastrophe risks.

Despite the severity of damages, insurers are well-equipped to manage the financial impact of a catastrophe on this scale. The U.S. personal lines insurers have benefitted from recent favorable market conditions and have built up policyholder surplus for an unexpected event like Katrina. A. M. Best, an insurance rating and information agency, reports that almost all rated companies will be able to meet their commitments. A few individual companies' ratings may be lowered.

Most insurance market analysts note that there is no state in the union that is not subject to catastrophe exposure, and the current state of affairs suggests that the exposures are far greater than the insurance industry is now prepared to handle. Although the insurance industry will likely emerge largely intact from Hurricane Katrina and is better capitalized now than ever, it simply does not have sufficient capital to fund a mega-catastrophe. This fact is not new. Insurers and financial market experts knew after Hurricane Andrew in 1992 that outside capital was needed to supplement industry capacity. Since then, new capital has entered the catastrophe insurance market.

As Members of Congress explore ways to respond to Hurricane Katrina, they may be called upon to consider federal policy alternatives to build national capabilities for disaster risk management. Among measures that might be explored are various legislative proposals to pre-fund the cost of disasters with insurance or capital market instruments (risk securitization).

This report will be updated as events warrant.