http://www.guardian.co.uk/hurricanes2005/story/0,16546,1576582,00.html

see also: Katrina will be biggest bill in history, says insurer
Friday September 23, 2005

Lloyd's fears Rita may bring $60bn stress test to life 

∑Direct hit on Houston is insurers' disaster scenario 
∑Profit warning already expected at Munich Re 

Jill Treanor
The Guardian 

As Hurricane Rita swept towards America's Gulf coast yesterday,
insurance experts in the City of London will have experienced a
sensation of deja vu: the prospect of a major storm hitting the Texan
city of Houston - now directly in Rita's path - is one of the market's
"realistic disaster scenarios". The threat of this specific calamity
acts as a so-called "stress test" which insurance experts use to
calculate whether the market has the financial strength to deal with a
major disaster.

The un-computed reality, however, is that Rita is the second big storm
to hit America's southern states in the space of a month. Right now,
with Katrina predicted to be the costliest insured natural disaster in
history, the financial impact of both storms coming so close together
can only be guessed at.

As part of its financial emergency planning, Lloyd's has required each
of the syndicates that make up its market to pretend that the industry
has been hit by a $60bn (£33bn) loss caused by a windstorm hitting Texas
and slamming into Houston. Under Lloyd's pretend pattern of damage,
there would be $10bn of losses caused to offshore energy - oil rigs and
the like - and $50bn of mainland property losses.

Katrina, of course, is already forecast to hit the insurers with claims
of this sort of level. The largest single bill faced by the industry
before came with the clean up after Hurricane Andrew in 1992, costing
$21bn. Meanwhile, the four hurricanes that hit Florida last year cost a
total of $28bn, according to the big European insurer Swiss Re.

Referring to the confluence of Katrina and Rita, Roger Field, group
underwriting director at Brit Insurance, said: "These are very large
indeed and to have two of this size in one year is without doubt
exceptional." That fact was certainly understood in the stock market
yesterday, where speculation swirled of a full blown profits warning at
Munich Re, the world's biggest reinsurer. Munich's market value has
fallen £700m since Katrina struck; yesterday the selling spread to other
big European names, such as Hannover Re and Zurich Financial Services,
while in London insurers with exposure to Lloyd's syndicates such as
Brit and Goshawk were also marked lower.

Brit, which runs the eighth largest syndicate at Lloyd's, was busy
yesterday running computer models on Rita - even before she hit land.
Its claims department was preparing to make contact with local loss
adjusters, who go in to assess the cost of the damage caused by
disasters. While the people of Houston and the surrounding areas were
preparing to evacuate, the loss adjusters are often the people looking
for a way in to the damaged areas.

This was also the case when Katrina struck New Orleans, though on that
occasion loss adjusters were refused entry for several days in the face
of flood waters.

It is clear now that the flood waters caused the insurance industry
specific difficulties. Insurers expect flood waters to gush in and then
subside quickly, rather than stagnating, as they did around New Orleans.
In this case the water also mixed with oil and other pollutants.
Insurers fear that buildings under water for such a long time will have
to be completely rebuilt.

The situation has been made even more complicated by the fact that a
decision will need to be made about how much of the damage was caused by
the hurricane and how much by the flood that followed. This is crucial.
Flood cover is excluded from many policies around New Orleans since
flooding has long been considered a real threat. All other damage will
be covered by the policies sold by insurers.

The complexity of assessing the damage caused by Katrina means that the
total bill will not be known for many months. Lloyd's of London has made
an initial estimate of £1.4bn for the direct losses it expects to incur
as a result of Katrina. But this is only a first attempt at calculating
the Katrina losses based on predictions made by its syndicates. The
final bill could rise substantially.

Analysts at stockbroker Numis yesterday predicted that Rita would be
"another expensive loss to the insurance industry although perhaps not
as costly as Katrina, where flood damage in New Orleans has been such a
major factor". They pointed out that the trading environment for
insurers could actually improve as a result of the storms. The
expectation of the industry is that it will be able to push up the cost
of insurance as result of the disasters, potentially boosting profits.

One insurer, Kiln, which runs four syndicates at Lloyd's, confirmed the
expectation of higher insurance rates yesterday by announcing it was
asking Lloyd's for permission to take on more business than it first
planned. Until Katrina struck, Kiln had been expecting to have to cut
the cost of the insurance it sold, not raise the price.

As Rita is not expected to hit land until Friday night, the insurers
will not know for certain her intensity or trajectory until then. But at
least the Lloyd's of London disaster planners will know that they have
picked a scenario that is potentially realistic. It may not be too long
before they discover whether their estimate of losses matches the
reality.

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