Commercial Market Reassessed, Remains Strong Following Katrina

It may come as a surprise with all the attention put on homeowners' claims, but more than 51% of insured losses from Hurricane Katrina were paid by the commercial sector.

Commercial insurers paid out more than $21 billion dollars following Katrina. Add $2 billion to $3 billion more from offshore energy and marine. Homeowners insurers paid about $18 billion.

Five years after the storm, a vast majority of commercial insurance in Louisiana and Mississippi remains with private insurers, as the area remains in transition and recovery.

"We still find it a viable place for our property business," said Michael Murphy, president of Arch Insurance Group's property/casualty group. "These risks are still insurable. Pricing did go up and capacity reduced."

Lexington Insurance Co. actually increased their capacity for New Orleans business post Katrina, said Sanjay Godhwani, executive vice president and property division executive at Lexington Insurance Co. "We were very comfortable with the added exposure," he said.

Katrina also created some immediate opportunities, said John Wood, president and chief executive officer of Specialty Risk Associates.

"Debris removal, reconstruction, rebuilding -- all those guys had to be insured," Wood said. "The (excess and surplus) markets were presented opportunities as well, as insurers took a step back."

Robert Hartwig, president of the Insurance Information Institute, said insurers took away a "larger understanding of insuring storm surge." Underwriting flood risk is one of the biggest areas of change since Katrina, said Don Parkes, senior director of business solutions for First American Corp. Katrina "revealed some weaknesses in catastrophe models," reminding insurers there is uncertainty, added Murphy.

"Some companies are now beginning to take note of this exposure, analyzing their portfolios, using more and better data at the time of underwriting and are beginning to manage this risk using probabilistic models on a portfolio level," Parkes said.

Immediately following Katrina, insurers regrouped and reassessed exposure. Some carriers underestimated their aggregates or were over-concentrated in the Gulf, Murphy said. Insurers reduced exposure, average limits declined, prices and retentions increased, and coverage terms were revisited.

Murphy said Arch didn't change its underwriting but "we do probably build more conservatism into our large account limit usage and are warier of frame and substandard construction in our E&S business."

In the commercial sector, flood is covered in some policies, but the losses were really felt in business interruption coverage, Hartwig said. This may have been no more evident than with casinos in Louisiana and Mississippi. Multiple Gulf Coast casinos -- seven in Biloxi -- were heavily damaged following Katrina. The casinos in Mississippi generate about $1 million per day.

Due to regulatory requirements, replacement space is not a possibility, so casinos either repair or rebuild. In addition, suppliers need to be licensed to do business with a casino, so distributors of slot machines, poker machines and gaming tables could be scarce.

"The business interruption loss potential is tremendous," said Godhwani. "You must understand the metrics to quantify BI pricing. There is a significant incentive in this industry to get up and running as soon as possible to maintain our customer base."

Confidence in the models prior to Katrina gave insurers the comfort to expand programs to include floating casino accounts, usually as part of a land-based casino or hotel account.

"Underwriters did understand the risk, but risk management and engineering data suggested many floating casino were designed for 12- to 16-foot surges and that some casinos could even float away on bigger surges," Murphy said. "Underwriting gave too much credit to the model and the engineering."

Underwriters are keen at determining how long it would take to get operational following an event like a hurricane and make sure the casino has a plan and keeps important records -- such as licenses, accounting statements and employee information -- secure, said Loretta Worters, vice president of communications with the Insurance Information Institute.

(By Chad Hemenway, associate editor, BestWeek: [email protected])