No one would expect insurers in the catastrophe insurance
business to be perturbed either by man-made or
natural calamities, as they have, for the past few years.
For insurance companies which offer catastrophe cover under
various lines of business, managing mega risks is just a way of life. But
the past two decades have virtually stood this logic on its head. And
to these insurers who thrive on mega risks, nature has never seemed
so hostile and risks so alien, as they are seeming for the past 20 years
or so. Although the entire industry has been trying its best to meet
the spiraling benchmarks that the growing intensity and frequency
of natural calamities, acts of terrorism and pandemics, such as
SARS are imposing on them, they have realized an inarguable
factwith the growing frequency and magnitude of New
Generation catastrophes (which began in living memory with Hurricane
Andrew in 1992, in Florida, US) it is no longer going to be business as
usual for them.
Perhaps no other catastrophe exemplifies the power of Super
CATs than Hurricane Katrina, which devastated a large tract of the
South East coast of US in 2005, going down in global history and in
the history of US, as the costliest disaster ever to strike US since the deadly Great Hurricane Miami
made landfall in 1926. Hurricane Katrina broke records set by the World Trade Center disaster. It is estimated
to have generated economic (insured and uninsured) losses of $80 bn to $130 bn of which insured
losses constituted $40 bn to $55 bn (in 2005 US$) as against a figure ranging between $34 bn to $41 bn by
the World Trade Center holocaust. How does Miami compare with this? Miami, in fact, wreaked havoc in
1926 that was even more devastatingaround $130 bn in 2004 adjusted
dollars in 1926. But in actual
terms, its damage may have been more limited, taking coastal population and property values prevailing then,
into account.
The destructive impact of Katrina was unprecedented and phenomenal. Estimates put the
combined losses of Hurricanes Katrina and Rita at $140 bn, with the major share attributed to Katrina.
Skewed statistics did create some confusion initiallyfor example, the Congressional Budget Office (CBO)
estimates for the combined impact were as low as $70 bn, but it later emerged that they had excluded claims
arising from business interruption (this line of business was badly affected in the case of Katrina) as well as clean
up costs, demolition and other losses. These were some of the most difficult lessons taught by Katrinathat
a Super CAT is essentially different from a normal catastrophe and can send costs up manifold due to
peripheral causes. For example, these could arise from the need to demolish whole structures and localities
because the intensity of the hurricane had rendered them irreparable. Or, they could also result from the need
for mass evacuation and acts of destruction that do not happen in the case of a normal catastrophe. |
