December 30th, 2008

2008 Catastrophe Update

Posted at 1:00 AM ET

Julian Alovisi, Assistant Vice President, Instrat®
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A record-setting Atlantic hurricane season and above-average manmade catastrophe losses put 2008 among the costliest years on record. While the economic downturn dominated the headlines throughout the year, lurking in the shadows was one of the most active hurricane seasons on record. Hurricanes Ike and Gustav, combined with other weather-related events and several large manmade catastrophe losses, triggered insured losses of USD50 billion in 2008.[1] Although weather-related events remained the largest source of losses (USD43 billion in total), several manmade catastrophic events triggered insured losses of USD7 billion, significantly higher than the annual average of USD4.8 billion.

Global Insured Losses

Insured losses for 2008 are up 79 percent from USD28 billion in 2007, according to estimates from Swiss Re. The 10 year moving average of insured loss costs continued its relentless rising trend in 2008, increasing by 7 percent-from USD35.5 billion to USD38 billion.

The two largest single losses of the year were Hurricanes Gustav and Ike. According to ISO PCS (which tracks insured property losses in the United States), Hurricane Gustav caused an insured loss of USD2.2 billion[2] in the United States, while Hurricane Ike triggered claims worth USD10.7 billion.[3] Swiss Re estimates Ike’s total insured loss (onshore and offshore) could reach USD20 billion,[4] the fourth biggest loss ever.[5] The deadliest event of 2008 was Cyclone Nargis, which hit Myanmar in May 2008, causing more than 138,000 deaths.

The 2008 hurricane season produced a record number of consecutive storms striking the United States and ranks as one of the more active seasons in the 64 years since comprehensive records began. The combined insured loss of Hurricanes Gustav and Ike in the United States reached USD 12.8 billion, which in part explains why ISO PCS reported catastrophe losses of USD24.9 billion in the first nine months of year-compared with USD 4.7 billion for the same period in 2007.

Other notable storms from the 2008 season included Hurricane Dolly in Texas (estimated to have caused about USD525 million in insured losses[6]), Tropical Storm Fay in Florida (with about USD245 million in losses[7]), and Tropical Storm Hanna in the Carolinas (with about USD80 million in losses[8]).

Tropical Cyclones

The 2008 Atlantic hurricane season produced 16 named storms, including eight hurricanes, five of which reached or exceeded Category 3 strength. This is generally consistent with ranges predicted by forecasters at the Colorado State University.

The 2008 season is tied as the fourth most active in terms of named storms (16) and major hurricanes (five). It is tied for fifth in terms of hurricanes (eight). For the first time on record, six consecutive tropical cyclones (Dolly, Edouard, Fay, Gustav, Hanna, and Ike) made landfall on the U.S. mainland, and a record three major hurricanes (Gustav, Ike, and Paloma) struck Cuba. This is also the first Atlantic season to have a major hurricane form in each of five consecutive months (July: Bertha, August: Gustav, September: Ike, October: Omar, and November: Paloma).

Hurricane Ike was the strongest and most destructive storm of the season, ravaging Cuba as a major hurricane and later making landfall near Galveston, TX as a strong and large Category 2 hurricane. It caused a particularly devastating storm surge along the western Gulf Coast of the United States due in part to its large size. Its strong winds caused extensive property damage and badly disrupted offshore energy interests. As indicated, ISO PCS said Hurricane Ike caused an insured loss of USD10.7 billion in the United States, which ranks as the country’s sixth most costly catastrophe for insurers in history.

10 Costliest U.S. Catastrophes
Event/Date Estimated Insured Losses*
Hurricane Katrina/August 2005 43.6
Hurricane Andrew/August 1992 22.9
World Trade Center, Pentagon Terrorist Attacks/
September 2001
22
Northridge, CA Earthquake/January 1994 17.5
Hurricane Wilma/October 2005 10.9
Hurricane Ike/September 2008 10.7
Hurricane Charley/August 2004 8.2
Hurricane Ivan/September 2004 7.8
Hurricane Hugo/September 1989 7
Hurricane Rita/September 2005 6

*Adjusted to 2007 USD billions
Sources: Insurance Information Institute, ISO PCS

Hurricane Ike provided the modeling companies with their first stern test since Hurricane Katrina hit the Gulf Coast in August 2005. Following weeks of speculation that initial predictions had underestimated damage from the storm, Risk Management Solutions (RMS) revised its estimate from a range of USD7 billion to USD12 billion to one of USD13 billion to USD21 billion on October 24, 2008. In contrast, EQECAT and AIR Worldwide did not revise their original post-landfall estimates upward.

Post-Landfall Modelled Insured Losses for Hurricane Ike
Modeling Company 1st Post-Landfall 2nd Post-Landfall 3rd Post-Landfall
RMS 6-16 (onshore and offshore) 7-12 (onshore and offshore) 13-21 (onshore and offshore)
AIR Worldwide 8-12 (onshore US properties) N/A N/A
EQECAT 8-18 (onshore US properties) 8-12 (onshore US properties) N/A

All estimates in USD billions
Sources: RMS, AIR, EQECAT

Hurricane forecasters are already warning that the 2009 storm season is likely to be above average, as well. Colorado State University’s forecasters expect 14 named storms, seven hurricanes and three major hurricanes to develop in 2009.[9] In addition, RMS expects hurricane activity in the Atlantic over the next five years to be significantly above the average of the long-term historical record, particularly for major hurricanes.

Other Events in 2008

In March 2008, Windstorm Emma’s powerful winds hit northern and eastern regions of Europe, leaving a trail of destruction and disruption as cars were blown off roads, roofs were ripped off houses and trees were downed. Windstorm Emma moved north of the United Kingdom on February 29, 2008, causing gale-force winds to spread across Scotland and northern England. By March 1, 2008, Emma had brought gale-force winds and heavy rains to Central Europe, causing widespread damage and disruption in several countries including Germany, Austria, the Czech Republic and Poland. There were reports of Emma packing winds of up to 155 kmph (95 mph) as it crossed central regions of Europe. Germany received particularly bad damage as gale-force winds toppled power lines which knocked out more than 5,000 transformer stations across the country, cutting power to hundred of thousands of homes. According to Swiss Re, insured losses from Emma could total USD1.3 billion, with Germany accounting for the bulk of the losses.

There were frequent reminders of the risks posed by earthquakes in 2008. The most deadly and costly earthquake in 2008 hit the Chinese province of Sichuan in May, killing more than 85,000 people. The earthquake, measuring 7.9Mw, was the most powerful to hit China in 30 years. It destroyed more than 5 million houses and damaged a further 21 million, according to the Ministry of Civil Affairs. RMS said property losses from the event (insured and uninsured) could reach up to USD15 billion. Although only a fraction of the loss is likely to be covered by the insurance industry, it still expects the earthquake to trigger one of the highest ever insured loss in China. AIR Worldwide, meanwhile, said insured losses could range from CNY2 billion to CNY7 billion (USD290 million to USD1 billion).

China was also hit by severe snow and ice storms in February. The snowstorms were the worst to hit the country in more than 50 years and affected 21 provinces and 100 million people. According to the Ministry of Civil Affairs, the snowstorms triggered economic losses of some CNY80 billion (USD11 billion), and Swiss Re said total claims could reach up to USD1.3 billion.[10]

The United States had more to contend with than just hurricanes in 2008. In May and June, heavy rain triggered severe floods across the Midwest region, inundating up to 40,000 homes and businesses and causing widespread disruption. Reports said the flooding was the worst to hit the Midwest in 15 years and caused billions of dollars of damage to crops. According to the Federal Emergency Management Agency (FEMA), more than 11 million people in nine Midwestern states were affected by the flooding. Record amounts of rainfall triggered flash flooding in Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin and caused river levels in these states to reach record or near-record levels. Several river levels, according to various reports, surpassed those reached in the Great Floods of 1993. Iowa, Indiana, and Illinois were the hardest hit, as runoff from the torrential rain fed the Mississippi and Ohio Rivers. Despite the low penetration of private flood insurance coverage in the affected region, ISO PCS said insured losses from the floods were expected to reach USD725 million.[11]

In Southern California, meanwhile, wildfires once again demonstrated their destructive power in November when three wildfires fanned by hurricane-force Santa Ana winds forced tens of thousands of people to evacuate their homes. Around 980 homes, ranging from multi-million dollar mansions to more modest mobile homes, were destroyed by fires that stretched from Santa Barbara to southeast of Los Angeles. EQECAT said the fires are expected to cause a total property loss of up to USD500 million. AIR Worldwide, meanwhile, estimates that total insured losses from the fires are likely to range between USD600 million and USD800 million.

Finally, 2008 was also a very active year for manmade catastrophe losses. Swiss Re said insured losses for manmade catastrophes totalled around USD7 billion (USD4.8 billion for explosions and major fires, USD2.1 billion for industrial and warehouse damage, and USD1.5 billion for oil and gas related incidents). Risk losses in the mining, energy, and steel industry were particularly large in 2008, with claims exacerbated by the impact of record high commodity prices on business interruption cover. According to Swiss Re, the largest risk loss of 2008 (USD1.8 billion) occurred in June because of a ruptured pipeline on Varanus Island in Western Australia, which reduced the supply of natural gas to Western Australia by 30 percent.

Footnotes

  1. Swiss Re Press Release - 18 December 2008
  2. ISO Catastrophe Serial No. 58
  3. ISO Catastrophe Serial No. 60
  4. Swiss Re Press Release - 18 December 2008
  5. Insurance Information Institute
  6. ISO Catastrophe Serial No. 53
  7. ISO Catastrophe Serial No. 57
  8. ISO Catastrophe Serial No. 59
  9. http://tropical.atmos.colostate.edu/forecasts/2008/dec2008/dec2008.pdf
  10. Swiss Re Press Release - 18 December 2008
  11. ISO Catastrophe Serial No. 45
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