Hurricane to whip up cost of insurance

Local businesses and homeowners are facing the prospect of insurance premium increases to help cover the enormous clean-up bill for Hurricane Katrina which has ravaged the United States gulf states.

It is estimated the insurance losses from Katrina, whose casualties could be in the hundreds and which drove tens of thousands of people from their homes as it swept across Louisiana, Mississippi and Alabama, will be as high as US$26 billion ($37.7 billion).

That would make the storm the US's most expensive, ahead of Hurricane Andrew in 1992 which caused some US$21 billion in insured losses to property in Florida and along the Gulf Coast.

Insurance companies will pass much of the cost of their payouts to the large global reinsurance businesses which also back policies written elsewhere, including New Zealand.

Reinsurers raised their charges to New Zealand insurers by large amounts in the months after the September 11 attacks as they sought to cover their share of the US$70 billion insurance bill.

Insurance Council chief executive Chris Ryan said those increases filtered through to commercial insurance premiums which subsequently rose as much as 30 per cent.

"The reality is that incidents like Katrina will impact on our market," he said yesterday.

"If it's $40 billion there will be some impact on our market and it is likely that the impact will see some sort of increase in premiums in the next little while."

Vero Insurance NZ chief executive Roger Bell said the sheer scale of the losses from Katrina would drive insurance premiums higher.

"It's too early to put a number around it but the early damage estimates are astonishingly high and likely to go higher," he said.

"If reinsurers have suffered large losses - which seems probable - they would look to increase prices pretty much around the world. If they do that individual insurance companies will have to make their own judgment on to what extent they will pass that on to customers.

"Inevitably, it will filter through, maybe over the next 12 to 18 months, into prices in New Zealand right across the book of business, including commercial and personal insurance."

But David Middleton, general manager of the Earthquake Commission, which pays $30 million a year to international reinsurers for $1.5 billion in cover, says predictions of premium increases as a result of Katrina were premature and "extremely speculative".

Although the conventional wisdom was that big disasters drove the cost of reinsurance up, "we don't know yet what the cost of this disaster is - there's been no real word.

"Comments this early about the hurricane forcing insurance premiums up are a little self-serving."

IAG underwriting head Karl Armstrong said: "It's early in the game in the sense of what the actual insured loss is going to be."

He pointed out that the September 11 attacks impacted on a reinsurance market that was already in a difficult situation. Since then, there had been remedial action to strengthen the industry.

Armstrong said last year the US had been hit by four hurricanes, resulting in claims totalling about US$28 billion. "We didn't see any reaction in the reinsurance market."

But if the insurance bill ultimately did come at the high end of estimates "there will be a ripple effect through the world market. But there's not going to a knee-jerk reaction, certainly not in New Zealand."

Meanwhile, the economic consequences of Katrina will likely be felt in even higher petrol prices as oil scrambled back towards fresh highs above US$70 yesterday.

Dealers feared a sharp squeeze on fuel supplies after the storm shut down more than a tenth of the US's refining capacity and a quarter of its oil production.

Analysts fear more storms could herald a surge in crude prices towards US$80 a barrel.

Big bills

September 11 attacks: US$70 billion.

Hurricane Katrina: US$26 billion.

Boxing Day tsunami: US$3 billion to US$4 billion*.

(*According to consulting firm Risk Management Solutions)