Hurricane Katrina will become the most expensive insurance loss in U.S. history, surpassing Hurricane Andrew and the terror attack of Sept. 11, 2001, and could cause the insolvency of some small insurers in its wake.
Fitch said it expects losses to be on the high end of estimates and to surpass any insured loss the U.S. has yet experienced. It said a loss of "this magnitude always has the potential to stress or even render insolvent some insurers." It said the smallest insurers with concentration of risk face the greatest threat, while large insurers should manage. Some, however, may face downgrades.
"However, it is still too early to tell if this is the case and, if so, who is at risk of financial distress," Fitch said.
No insurer rated by Fitch is subject to Rating Watch. Preliminary analysis of loss exposure indicates insurers should be able to absorb the losses, the analyst said.
Aside from the levee break in New Orleans and widespread business interruption claims--factors for the increase in insured loss--Fitch noted several other reasons for concern:
o Losses from looting are generally not included in estimates of loss modelers
o Losses have a tendency to grow in size the longer they remain unsettled, and the extensive flooding will significantly delay adjusting and settlements
o There will be intense public and political pressure to settle claims, even those that are "ambiguous whether the damage is due to wind or flood."
Fitch also believes there is a "high risk of future loss development" due to the lengthy task of settling claims, affecting reinsurers more than primary insurers.
While it is unclear what the ultimate impact of Katrina will be on the industry, Fitch noted the storm "will have a material negative effect on 2005 industry earnings, and, to a lesser extent, surplus.
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