Real Risk

[

] 35

underwriting capacity to existing reinsurers for property cata-

strophe retrocession and other short-tail lines of business.

Given the revised outlook for major North Atlantic storms, insur-

ers are seeking higher prices for property insurance in areas of heavy

exposure. Rate increases as high as 400 per cent have been filed

along the Gulf Coast. In addition, insurers are very closely manag-

ing their book of business to avoid over-concentrations of risk.

Insurance markets play a critical role in society by signalling

through the price system that costs are reaching unsustainable

levels. In parts of Florida, we already see that the price of resi-

dential insurance is reaching economically prohibitive levels. The

net impact of such price signals, coupled with pressures from

emergency managers and environmentalists, is likely over time to

reshape basic development patterns along the coastline in exposed

areas of the Caribbean, and the Gulf and Atlantic coasts of the

United States. Parks and entertainment venues may be expected

to take up more of the shoreline, with residential and commercial

structures moved back to higher and less exposed land.

While the 2004-2005 storm season was a harsh reminder that the

destructive force of nature cannot be stopped, there are ways to

reduce its impact by mitigation and intelligent land use. The storms

of 2004-2005 can provide the necessary spur to such efforts, over-

coming the normal lethargy of the political and regulatory process.

Case in point: Long Island

In 1938 a violent hurricane known as the Long Island Express

tore through the south shore of Long Island, causing waves up to

50 feet tall and killing 50 people and 750,000 chickens in Nassau

and Suffolk counties. Now, instead of chickens, some of the most

expensive homes in the US are located in these areas.

In Long Island and New York City, Allstate has been dropping

customers while MetLife Auto & Home is restricting new poli-

cies in hurricane-prone areas. Premiums are increasing by 20-30

per cent and hurricane deductibles are expected to follow.

Residents of Long Beach are finding it increasingly difficult to

find any hurricane coverage at all, and where it can be found it

is expensive. Federal flood insurance figures suggest that many

residents of Long Island are not protected against a hurricane,

although it is thought that another major event of this kind is

statistically overdue. Around 40 per cent of households in Long

Beach are covered by the federally-backed flood insurance

programme, compared with more than 60 per cent of households

in many of the metropolitan parishes of New Orleans when

Hurricane Katrina struck. Indeed, in many areas of Long Island,

the percentage of households with flood insurance falls below 40

per cent. In Freeport, the figure is just over 20 per cent, while in

the richer precincts of Southampton it barely reaches 16 per cent.

The damage done by the Long Island Express was limited because

of the large proportion of farmland in the area. Now, the 600,000

population of 1938 has grown to more than 2.8 million, while

median home values have risen 30 per cent in the past three years

to become some of the highest in the US – the cost of a major storm

would now be extremely high in both human and material terms.

100

150

200

250

300

1950

1960

1970

1980

1990

2000

ACE (% of Median)

NOAA's accumulated cyclone energy (ACE) index

Decadal North Atlantic hurricane activity

Source: NOAA,

The 2004 North Atlantic hurricane season – A climate perspective

Hurricane Francis, 2004

Photo: courtesy of NASA