Regulators Say Industry Prepared for Katrina’s Cost

The National Association of Insurance Commissioners (NAIC) says that while the damages from Hurricane Katrina may set record losses, the property and casualty industry maintains the adequate capital and liquidity required to withstand claims arising from one of the most devastating natural disasters in U.S. history.

The U.S. property and casualty industry maintains policyholders’ surplus of roughly $390 billion and holds assets in excess of $1.3 trillion. State insurance regulators require insurers to maintain minimum levels of surplus to absorb the volatility inherent in property and liability policy coverages. Over 75 percent of the industry’s assets are held in marketable securities.

Helping assure the solvency of the insurance industry is a primary focus of state insurance regulators. As with past disasters, state financial analysts are well underway to assess the financial and operational impact of insurers affected by Hurricane Katrina. Working through the NAIC, states will be sharing assessments and coordinating the appropriate actions to help ensure claims are paid.

“These financial results demonstrate that insurers are up to the task of making good on the promises that they have made to American businesses and consumers through their insurance policies,” said Diane Koken, NAIC President and Pennsylvania Insurance Commissioner. “Some smaller insurance companies will experience financial distress, but the overall condition of the industry should remain healthy.”

Advanced climate technologies utilized in recent years have assisted insurers in anticipating major natural catastrophes like earthquakes, hurricanes and tornadoes.

“Over the last decade, insurers have become more sophisticated in their ratemaking techniques,” said Tim Wagner, NAIC Chair of the Property & Casualty Committee and Nebraska Insurance Director. “In place of historical claims data that insurers traditionally used to price for catastrophic events, computer simulation models are used to develop estimated loss costs associated with catastrophic events, including hurricanes.”

Rates are determined using a state’s historical loss data for most perils covered by homeowners or other property insurance products with a factor added for catastrophic losses. As a result, most states should not see homeowners and other property insurance rates rise substantially as a direct result of Hurricane Katrina.

Early estimates place insured losses attributable to Katrina in excess of 1992’s Hurricane Andrew, greater than any other U.S. hurricane event. These losses will be averaged over a long period of time (typically 30 to 50 years for property insurance) and reflect estimated catastrophe costs. Since insurance rates already include a factor that reflect losses from catastrophes, like Hurricane Katrina, the NAIC does not expect property insurance rates to be significantly affected.

The NAIC recognizes that extensive flooding, loss of electricity and displacement of people has hindered insurance adjustors’ access to affected residents and business owners.

Headquartered in Kansas City, Missouri, the National Association of Insurance Commissioners (NAIC) is a voluntary organization of the chief insurance regulatory officials of the 50 states, the District of Columbia and five U.S. territories. The association’s overriding objective is to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry by offering financial, actuarial, legal, computer, research, market conduct and economic expertise. Formed in 1871, it is the oldest association of state officials. For more information, visit NAIC on the Web at: www.naic.org/pressroom