The slogan could be 'the four in '04 that changed property/casualty insurance', suggests Libby Bruch, as re/insurers absorb the reality and the consequences of multiple smaller storms collectively causing more damage than one large storm

So far this year, hurricanes Charley, Frances, Ivan, and Jeanne together have racked up estimated damages of $28bn, surpassing 1992's Hurricane Andrew, whose destructive forces cost $20bn-$21bn in today's dollars. As a result, "there probably will be a change in market dynamics," according to Damien Magarelli, associate director in Standard & Poor's insurance ratings.

Traditionally, reinsurers offered one reinstatement within the hurricane coverage they provided. Now that primary insurers have requested coverage for second, third, and fourth events, reinsurers will focus more on the probability of subsequent storms. "They will likely raise rates to cover multiple events, focusing on pricing adequacy," Mr Magarelli added. Primary insurers, of course, will pass these added costs on to their policyholders.

Because the succession of hurricanes affected so many insurance and reinsurance companies, both premiums and deductibles will likely rise, reversing a decline over the past year or two, which itself followed increases after the 11 September 2001 tragedy. But rather than across-the-board rate hikes, insurers may limit increases to the affected areas, which would obviously include Florida. In other regions, the decline in rates may slow or abate.

Residential property, as opposed to commercial structures, suffered most damage from the hurricanes, largely because more stringent building codes on the commercial side required stronger and more durable construction.

Frequency, severity and risk management

Insurers and reinsurers failed to capture the true economic losses of these four hurricanes because they did not plan for the frequency of these events, coupled with their severity. In rapid succession, Charley and Frances did $11bn worth of estimated damage, Ivan followed with $10bn, and Jeanne will likely cost $7bn.

"Hurricane catastrophe losses this year are clearly above expectations for the majority of companies," noted Mr Magarelli, despite the fact that reinsurers expect multiple losses as a matter of course and embed them in their risk models. "But the frequency and severity of these four hurricanes have led companies to reassess their risk management techniques for multiple events."

While the industry managed risk better than it had for Hurricane Andrew, most risk management techniques based their assumptions on another occurrence like Andrew. Consequently, primary insurers have taken the heaviest hit because a series of several smaller storms, considered four individual losses, meant they did not reach the trigger point for reimbursement on all of them.

Primary insurers may want to put more emphasis on risk modelling from now on. And they have more data, including unusual phenomena such as multiple events, hurricanes that split and return, and storms with atypically wide tracks that cause substantial wind damage. Models going forward should incorporate this data to a larger extent, but they will always have some error because they are essentially a best guess.

The state-sponsored Florida Hurricane Catastrophe Fund, which effectively serves as a reinsurer for residential property, has taken some of the pressure off the insurance and reinsurance industry. Its coverage kicks in when industry wide claims from a single storm exceed $4.5bn. "The Florida Hurricane Catastrophe Fund definitely absorbed some of the expected losses," Mr Magarelli explained.

"Estimates peg the Florida Hurricane Catastrophe Fund payout on claims for the four hurricanes at $3bn," according to Robin Prunty, director in Standard & Poor's public finance ratings. Since it has $6bn of cash on hand, the fund should have no trouble meeting these obligations. With a maximum exposure of $15bn, regardless of how high claims rise, the fund also has the authority to levy assessments and issue bonds if it requires additional money.

Citizens Property Insurance Corp, which writes windstorm policies as well as personal lines and commercial lines that private insurers will not cover, also has the authority to assess homeowners throughout Florida if it needs to raise money. With loss estimates of about $1.8bn, the likelihood of an assessment at this time is not clear. More than half of Citizens' policy exposure is in South Florida (Miami-Dade, Broward, and Palm Beach counties), which largely escaped the fury of the storms.

None of the private-sector catastrophe bonds with exposure to Florida hurricanes, collectively worth $1.2bn, have to date reached the trigger points in damage claims that would erode their principal. Most of these securities require single massive events to activate their triggers, which reset for each storm. Residential Re 2003, issued by USAA, represents one exception. Its trigger accumulates damage claims for an entire season, resetting per year rather than per event. This year, covered storm damage has so far reached only the halfway point of Residential Re's trigger, and with the worst of the hurricane season over, its bondholders will likely not lose any of their principal.

Size matters

Given the magnitude of the cumulative losses during this current hurricane season, the inevitable question has arisen: will claims overwhelm any individual insurance companies and force some of them out of business?

"Some smaller companies with concentrated exposure may be at risk," responded Mr Magarelli, citing how American Superior Insurance Company is now in rehabilitation. But most, if not all, of these at-risk companies will likely be primary insurers that write business only in Florida and do not have much reinsurance. Damage from Charley and Frances has probably used up what reinsurance they did have, which has left them with no protection from Ivan and Jeanne. Standard & Poor's generally does not rate these small companies.

Among the better known and larger insurance companies, many established Florida-only subsidiaries shortly after Hurricane Andrew in 1992, which has walled off the riskiest part of their hurricane exposure. Would the corporate parents step in and help the regional subsidiaries, such as Florida State Farm Insurance or Allstate Florida Insurance, if insolvency threatened them? "At this point, national companies will likely support their Florida subsidiaries, but they are under no obligation to do so," cautioned Mr Magarelli.

Many of the Bermuda start-up reinsurance companies that sprang up in the wake of September 11 have exposure to the hurricane damage in Florida.

While claims for some will be in line with their expectations and any losses will be minimal, others will see net losses ranging from moderate (most likely for multiline insurers), to sizeable (particularly for those specialising in the property/catastrophe area, such as PXRE, and RenaissanceRe).

"For the most part, losses will range between one quarter's earnings up to a full year of earnings," reported Laline Carvalho, director in Standard & Poor's insurance ratings. "But none of these are out of balance. We're not seeing anything that is alarming."

As the damage from each successive hurricane has mounted and claims have increased, Standard and Poor's has modified its view on what it may mean for the insurance industry. "Clearly we have identified some companies that will get a fresh look," Mr Magarelli said. " Since we started to see that some reinsurers will have weak earnings for the year and some might have net losses for 2004, we will likely evaluate them closer toward the end of the hurricane season."

Overall, the financial strength of insurance companies remains sound, and no major problems have occurred. There is one major caveat, though: the hurricane season officially runs until the end of November.

Figure 1: Estimated Hurricane Loss

ACE Ltd: $480m pre tax*

Alea Group Holdings (Bermuda): $55m pre tax

The Allstate Corporation: $1.06bn after tax net of recoveries

Amlin: $263m gross ($133m after reinsurance)*

Arch Capital Group: $140m net after tax*

Aspen: $135m net of reinsurance and tax

AXIS Capital: $190m - $210m net after tax

Catlin Group: $50m net pre tax

Converium: $12m - $20m gross (Jeanne only)

Endurance Specialty Holdings: $115m net after tax

Everest Re Group: $190m net after tax*

IPC Holdings: $100m net*

Kiln's Syndicates: £10m - £15m pre tax*

Max Re Capital Ltd: $20m - $25m

Montpelier Re Holdings: $185m - $235m net*

Munich Re: EUR500m*

Odyssey Re Holdings: $35m - $46m net after tax (excludes Charley)

PXRE Group: $80m - $105m net after tax

Quanta Capital Holdings Ltd: $46m net after tax

RenaissanceRe Holdings: $425m

SCOR: $27m pre tax

Swiss Re: $750m pre tax*

Transatlantic Holdings: $97.5m net after tax

Wellington Underwriting: £15m net before tax

XL Capital: $450m ($260m reinsurance/$190m insurance) net

*includes losses from Pacific typhoons

Source: Global Reinsurance/company announcements