Hurricane Katrina's Impact on the Global Insurance Industry

Hurricane Katrina's effects can still be felt in the insurance industry years later.

In 2005, Hurricane Katrina slammed into the Gulf Coast of the United States, becoming the worst natural disaster in American history. The damage caused by Katrina was estimated at $100 billion, far eclipsing the damage total of Hurricane Andrew in 1992. In the aftermath, insurance companies found themselves bombarded with claims at a rate never before known in history.

The Losses

The insured losses resulting from Katrina were estimated at being between $40 billion and $55 billion. This more than doubled the amount of the former most costly hurricane and eclipses the September 11, 2001, terrorist attacks to become the biggest insurance loss ever in America. Obviously, numbers like these will have international consequences.

Hardening of the Market

Naturally, after a loss like Katrina, policy premiums will be on the rise.

Insurance costs for homeowners in catastrophe-prone areas worldwide were softening before Katrina came along. As time goes along without huge losses, the prices start to drop. An unequaled disaster such as this one causes the opposite effect. Not only in the area where the disaster happened is this felt. Essentially, the insurance companies in other catastrophe-prone areas learn from what happened with Katrina and raise their prices to guard against such an eventuality for themselves.

New Insurers

A staggering loss for the insurance industry like Hurricane Katrina tends to sideline new investors looking to get into the business. What is usually a burgeoning market slows as those with lots of capital to start up a business look elsewhere for profitable opportunities. A lack of new companies on the scene decreases competition, which causes the prices to remain fairly solid.

Mega-catastrophe Preparedness

Insurance companies always worry about the financial implications of disasters, but Hurricane Katrina forced them to worry about their ability to deal with the claims process in a crisis of these proportions. Events like Katrina and the 2004 Asian tsunami will cause global companies to consider mega-catastrophes--that is, disasters of a scope that we have never experienced in this age. Having the manpower, equipment and technology to handle such a situation at any given time is now a real concern for insurers.

Flood Insurance Awareness

Flooding was a side effect of Katrina that caused unimaginable, and uninsured, damage.

As staggering as the loss estimates from Katrina are, they are only the insured damage. Flood waters caused almost double the number. There has never been a disaster where so much uninsured damage was caused. This has caused people all over the world to take a closer look at what their standard homeowner policies cover and do not cover. Flood insurance will no doubt see a worldwide increase in flood-prone areas. Ironically, the disaster will cause these policies to cost more than ever. Because the flood insurance providers have dodged the big disaster, they will make millions in the aftermath.

References

• Analysis of Hurricane Katrina's Impact
• The Insurance Industry's Troubling Response to Hurricane Katrina
• Lessons and Implications for Catastrophe Risk Management