Real Risk

[

] 33

OR THE HURRICANE

EXPOSED

regions of the Americas, 2005

was a watershed year. Worldwide, estimated insured prop-

erty catastrophe losses currently stand at an all time record

of USD83.4 billion; USD72.6 billion of those insured losses

occurred in North America. That figure could prove to be conser-

vative, as litigation continues on key issues such as wind versus

flood cover. The level of global losses owing to catastrophes is

increasing, and seven of the ten most costly hurricanes have

occurred within the past two years.

The storms of 2005 imposed a disproportionate burden on the

reinsurance industry, members of which provide ‘insurance for

insurance companies’. Reinsurers have reported estimated losses

of USD20 billion from Hurricane Katrina alone. With assumed

total insured losses of USD45 billion, according to Swiss Re, close

to 50 per cent of Katrina losses were ceded to reinsurers, a much

higher proportion than the historical average of approximately

one-third for major catastrophes (Swiss Re defines a catastrophe

as an event with losses over USD77.5 million).

Caribbean nations have had a tough time over the past two

years. The 2004 wind season in the Caribbean was one of the

most active and destructive on record. Four major hurricanes

affected the region and the total industry loss for the Caribbean

was in the billions. This loss was distributed among various

islands, with the Cayman Islands, Bahamas, Dominican Republic,

Puerto Rico and Grenada all suffering losses. In 2005, the region

was again struck by hurricanes, with six major storms making

landfall in the Caribbean and inflicting heavy losses.

Changes in weather patterns

Studies by climatologists have suggested that recent increases in the

severity of US hurricanes may be linked to the sharp rises in land

and sea temperatures that have been recorded over the past 10-15

years. While land and sea temperatures have increased over the past

100 years, there has been a steep incline in the past 20 years.

Experts also believe that temperature changes influence the

increased hurricane frequency that has occurred during the past ten

years. Scientists theorize that the frequency of hurricanes is proba-

bly related to long-duration changes in the surface temperature of

the sea. These changes typically run on a cycle period of 20-50 years.

This cyclical event, called the ‘Atlantic multidecadal oscillation’, is

projected to continue for another 10-30 years. These cycles of hurri-

cane activity have been monitored over the past 50 years.

Above-normal activity was recorded from 1950 to 1969, followed

by below-normal activity from 1970 to 1994. From 1995 to the

present, we are witnessing a return to above-normal activity levels.

Impacts of increased North Atlantic storm activity for the

insurance industry

For the purposes of rate-making and risk management, insurance

companies increasingly rely on the information provided by model-

Property insurance in the post-Katrina world

Geoffrey Bromley, Chairman, Europe and Asia, Guy Carpenter

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

USA

Non-US

Worldwide insured property catastrophe losses (USD millions)

Source: Swiss Re, sigma No 2/2006