Ernst Rauch

01 Losses caused by the hurricane series in 2004 and 2005

The four most devastating hurricanes with landfalls in the Caribbean and the United States — Charley, Frances, Ivan, and Jeanne — presented the insurance industry with a new peak loss from tropical cyclones in the Atlantic of around US$ 30bn.

The most expensive year for insurers in this region before then was 1992, when Hurricane Andrew generated insured losses of US$ 17bn. According to Munich Re's analyses, Andrew would cost the insurance industry almost US$ 30bn today, given the increase in insured values in the affected regions of Florida and Louisiana since then.

The sum total of individual losses from hurricanes in 2004 was therefore not an extraordinary figure in itself. The surprising part was that a loss of these dimensions occurred only 13 years after Hurricane Andrew, since there are commercial models that put the "return period" for an annual market hurricane loss of US$ 30bn at well over 30 years.

The high loss accumulation from a series of moderate hurricanes was also unexpected for some risk carriers. Many insurers had responded to Hurricane Andrew by concentrating their efforts on estimating the accumulation loss potential of one major event — but these estimates were to be put to the test in 2005.

The natural catastrophe year of 2005 was marked by record losses from hurricanes in the North Atlantic, with insured losses exceeding US$ 83bn. Munich Re estimates that Hurricane Katrina alone generated privately insured market losses of US$ 45bn. This figure was boosted by Rita and Wilma, each costing around US$ 10bn, and significant insured losses from other storms like Dennis, Stan, and Emily.

A phase of rethinking is necessary

Two aspects in particular marked the year 2005: a mega-loss caused by Hurricane Katrina and a succession of moderate hurricane losses. Only a year after the most expensive natural catastrophe year in original values, the optimism displayed by many a market player proved to be unfounded. 2004 was not a solitary exception.

Losses in 2004 and 2005: Insured market losses from hurricanes

• —
  United States (mainland only) approx. US$ 95bn
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  Gulf of Mexico (offshore) approx. US$ 14-15bn
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  Caribbean approx. US$ 2bn
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  Mexico approx. US$ 2bn
• —
  North Atlantic (United States, Caribbean, Mexico) US$ 115bn

In all these regions, a process of fundamental rethinking is called for in the evaluation of hurricane risks. The United States mainland is particularly important in this regard, since high insured values will inevitably lead to high insured accumulation losses when the time comes.