February 27th, 2012

2011 Catastrophe Losses and Reinsurance Capital: Part III

Posted at 1:00 AM ET

Losses in United States

Significant weather-related losses also occurred in the United States in 2011 after one of the worst tornado seasons on record caused a combined insured loss of around USD20 billion. If considered a single event, the tornado losses in the second quarter would have ranked as the fourth most expensive disaster in US history, according to the Insurance Information Institute.

The United States also experienced its first landfalling hurricane in three years when Hurricane Irene came ashore along the Outer Banks of North Carolina as a category 1 hurricane in late August. Irene made three landfalls in total, also clipping New Jersey and New York as a tropical storm. Wind damage was limited due to the storm’s weakened state as it moved up the East Coast.

According to the Property Claims Service (PCS), Hurricane Irene caused insured losses of around USD4.3 billion in the United States. When combined with the high tornado losses sustained in April and May, PCS said insured losses in the United States exceeded USD30 billion in the first nine months of 2011. This compares with losses of USD14.3 billion in 2010 and even exceeds those incurred in 2008 when hurricanes Gustav and Ike came ashore in Louisiana and Texas (see Figure 1).

Figure 1

4_Catastrophe Losses in the United States from 1992 to Q3 2011

Catastrophe Model Changes

Adding to the pressure on the market was the impact of major catastrophe model updates, particularly for wind risks. Indeed, the three main catastrophe modeling companies, AIR Worldwide (AIR), EQECAT and Risk Management Solutions (RMS), have updated several wind models over the last 18 months (see Table 1) (1).

The release of version 11 of RMS’s US hurricane model in particular continues to cause much uncertainty for (re)insurers as inland risk estimates have risen due to slower dissipation rates for hurricanes and heavier damage for lower wind speed events. The revised storm surge component of the model has also impacted results in nearly every coastal region. This is particularly true for exposures on the Florida west coast, Louisiana, the southern coast of South Carolina, the Outer Banks of North Carolina and parts of New Jersey.

The degree of model version change prompted most reinsurers to take a step back and assess the drivers of change within the new model versions. As reinsurers continue to enhance their technical expertise, their incorporation of model components becomes increasingly tailored to their own view of risk. While the new model versions were a factor in the renewals, the treatment of the results varied by reinsurer. As many had previously adjusted for some of the changes included in the new versions the impact was somewhat muted.

Table 1

4_Significant Wind Model Changes in 2010 and 2011 TABLE


1 A detailed assessment of each significant model change was part of Guy Carpenter’s World Catastrophe Reinsurance Market Review, which is available from your Guy Carpenter representative.

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