Wilma’s Wake: Lessons From the Gulf

As Wilma's winds die away, and insurers deal with the third major loss event of this year's record hurricane season, the industry is faced with the task of re-evaluating risk in the Gulf area.

"Wilma was the biggest loss of the season for Florida and for a market that is still reeling from the record 2004 season -- this is a substantial loss," says Paul VanderMark, executive vice president for RMS (Newark, Calif.). "Although Katrina and Rita have been the headliners this season, a $6 billion to $10 billion loss is no small change. Insurers are already preparing to pull together information from the 2005 season to prepare for the next."

This hurricane season, which officially ends November 30, has produced about $50 billion in insured losses, according to Dr. Robert Hartwig, Insurance Information Institute's (III, New York) chief economist. The storms came frequently this season, just last year's four storms in Florida, which totaled $23 billion dollars in insured losses. The severity of last year's storms sparked insurers to file for 15 percent to 30 percent rate increases. With the severity of this year's storms being double, according to Hartwig, both insurers and reinsurers are likely to reaccess their risk and premiums for next season.

"Storms like Katrina make the very premise of offering insurance as something that is questionable," explains Hartwig. " This season has shown insurers they are probably overexposed at inadequate rates in these areas. So you've got a large number of companies -- Allstate (Northbrook, Ill.), Nationwide (Columbus, Ohio), Safeco (Seattle) and others -- pulling back from these markets or not writing any insurance at all in these markets."

If this happens, more policies will wind up in state-run insurance companies such as Florida's Citizen's Property Insurance (Tallahassee, Fl.), notes RMS's VanderMark. The storms, he explains, have RMS's clients questioning their risk management portfolios, "Catastrophe models did not anticipate the damage for this season. The industry was unprepared for an event of this magnitude, although the response, overall, went very well."

"Fortunately insurers came into this hurricane season very strong financially, so they were able to pay the record losses and record number of 2.5 million claims," says III's Hartwig. "It does strain human resources, particularly for the 15,000 adjusters who have been split all over from Texas to south Florida."

The damage done, experts such as VanderMark believe the insurance industry can learn to use technology to prepare for the next season. "After this season, insurers will pay closer attention to hurricane activity within exposed areas, have better data quality and backup, use conventional modeling lessons, use models to manage risk within portfolios and finally turn to super catastrophe demonstrations to approximate and amplify situations of total loss."

From an underwriting perspective, Dave Evans, senior vice president of Independent Insurance Agents and Brokers of America (Alexandria, Va.), says in the future insurers will make sure claims holders pay closer attention to contract details. "I think there are some new lessons we can take from these storms as opposed to the previous ones," says Dave Evans, "There has been emphasis on the language in the insurance contract, meaning wind and rain versus water damage versus the insured loss flood, and an increased awareness for the need of contingency plans."

Whatever controversy may have been raised by the flood coverage (or rather non-coverage) issue, Evans believes the industry performed well on the claims handling front. "At the end of the day the insurance industry has done a very good job of getting immediate funds to victims of the storms and they have worked as diligently as possible to deal with adjusting claims," says Dave Evans.

In affirmation, RMS's VanderMark asserts that, "The public has not been disappointed by the insurance industry's ability to meet their needs."

On The Net

www.iiaa.org
www.rms.com
www.iii.org
www.metlife.com
www.allstate.com
www.nationwide.com
www.safeco.com