Reinsurers are facing a testing hurricane season this year.Though early indications suggest Hurricane Ida is unlikely to cause damage on the same catastrophic scale as Katrina did in 2005, the major risk for reinsurers is that more storms are likely this hurricane season, in a repeat of events in 2005 and 2017.
New Orleans and more than one million households and businesses in Louisiana and Mississippi are currently without power.
Ida's winds may have exceeded Katrina's, which caused devastating damage, but the extent was smaller, and the storm surge hasn't reached the same levels. That increases the likelihood that New Orleans strengthened flood defences should hold, unlike 2005 when most of the city was inundated.
Charles Graham, Bloomberg Intelligence senior industry analyst, said: “Hurricane Ida will be bringing reinsurers a sense of déjà vu, with North Atlantic hurricane activity being the biggest event risk for reinsurers' exposure currently.
“However, there are strong reasons to believe Hurricane Ida may not cause loss on the same scale as Katrina in 2005: the New Orleans' flood-protection program has been substantially upgraded in a $14.6 billion project completed in 2011 and Louisiana has adopted new codes to reduce the vulnerability of buildings and the likelihood of wind damage.
“For capital requirement purposes, reinsurers model their exposure based on peak scenarios for a return period of 200 years under both Solvency II and Swiss Solvency Test rules. This can be compared with total risk capital or eligible own funds. The exposures modelled on this basis are significantly larger than any historic loss experience. Munich Re's €6.7bn exposure compares with €2.2 billion of claims from the three hurricanes in 2005. In 2017, hurricanes Harvey, Irma and Maria cost about €2.bn, net of retrocession.”
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