MONTE CARLO -- Hurricane Katrina tore ashore in late August with such fury that the insurance industry was unable to keep up with exactly how much damage she had done.
Two weeks after the storm wreaked havoc on Gulf Coast communities and oil platforms offshore, carriers, reinsurers and modeling vendors were still scrambling to update their original loss estimates.
And that has some people wondering just how accurate some of the models are, and whether catastrophe models themselves should be candidates for a downgrade or two of sorts.
"The impact on modeling will be big," said Henry Keeling, CEO of reinsurance operations of XL Capital. "Blind interpretation of models will be questioned."
He also said that many capital-markets companies that relied on insurance industry models before developing catastrophe risk products for investors may "pause a bit," and even turn away from selling such products altogether.
"It clearly causes a rethinking in the way we sell products and the way we price the product," said Jamie Veghte, CEO of XL Re America Inc.
Among the capital-markets players invested in catastrophe risk products are hedge funds. Managers who run these funds will now begin to reconsider the models used to make their investment decisions, analysts with Moody's Investors Service and Standard & Poor's said.
"Katrina will cause a rethinking of catastrophe models," said Ted Collins, group managing director of global insurance for Moody's. "For the hedge funds, that's a question they will be asking themselves."
By mid-September, many carriers, reinsurers and modeling firms had revised their loss estimates, and few expected even those revisions would stand once the flood waters began to recede and adjusters were allowed to survey the wreckage to policyholders' homes and businesses.
The world's largest reinsurer, Munich Re, for example, withdrew its initial loss estimate of $500 million when it became clear that the damage would far exceed it. Days later, on Sept. 12, Swiss Re announced it would double its $500 million loss estimate to $1.2 billion.
Modeling vendors were even busier in the wake of the hurricane. Risk Management Solutions Inc., which first announced a loss range of $10 billion to $25 billion, upped the damage window to between $40 billion and $60 billion by mid-September.
EQECAT increased its loss estimates from a range of $9 billion to $16 billion, to $14 billion to $22 billion, and finally from $26 billion to $43 billion. AIR Worldwide Corp. saw its estimates go from a range of $12 billion to $26 billion to $17 billion and $25 billion.
"I think this will also prompt another review of the reliability of the modeling agencies," said Simon Marshall, a credit analyst with Standard & Poor's.
Some of the differences were also due to the companies excluding damage from flood. Whatever the case, the differences added to the confusion and the uncertainty facing carriers and reinsurers.
Hemant Shah, CEO of the modeling firm RMS, admitted that it was "appropriate to be skeptical" about the catastrophe models, and said analysts and investors would need to "take a deep breath" when assessing the estimated losses incurred by a hurricane.
Models used to estimate New Orleans flood damage, for example, factored water coming in from the Mississippi or the storm surge created by the winds and tides in the Gulf of Mexico, said Shah. But the models didn't consider flooding from nearby Lake Ponchartrain, which dumped billions of gallons of water into the city after levees failed.
Executives with the broker Aon Re even went so far as to chide the industry for issuing irresponsible numbers reflecting Katrina's losses to the energy markets. Models predicting losses of $6 billion to $8 billion, when the real losses will be closer to $3.5 billion, do no service to clients, said Charley Cantlay, deputy chairman of Aon Re U.K.
Reinsurance executives, gathered in Monaco in September at the 49th Annual Rendez-Vous de Septembre, defended the release of loss estimates so early after the hurricane struck.
They blamed investors and ratings agencies for pressuring them to release loss estimates even though the industry executives believe it was irresponsible so early after a storm, particularly one like Katrina where the losses are complex.
Wilhelm Zeller, chairman of the executive board of Hannover Re, said his company was finally forced to issue a statement days after Munich Re and Swiss Re had made public their losses and agencies and investors were clamoring for information on the storm's impact on his company.
"There has been more immediate pressure from the ratings agencies to get a handle on the number than with any other event," Bill Adamson, head of the U.S. operations of Carvill, a reinsurance broker, was quoted as saying.
October 15, 2005
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