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The Impact of Hurricane Katrina on the Insurance Industry

November 3rd, 2015  |  Insurance

A little over 10 years ago, Hurricane Katrina slammed into the U.S. gulf coast, leaving billions in damage and more than a thousand deaths in the aftermath. It remains one of the costliest natural disasters in United States history.

I’m sure you all remember watching the footage. I know I sure do.

When it was all tallied up, between 1,200 and 1,800 people lost their lives, and countless others lost everything. Many of the folks who evacuated the city simply never came back, as floodwaters leveled the city in the hurricane’s aftermath. It’s believed that the storm caused more than $100 billion in damage, a number that’s mind-boggling to most of us dealing in thousands.

Just what effect did Hurricane Katrina have on the insurance industry?

According to industry reports, the insurance industry paid out approximately $41 billion in claims through homeowners and business insurance policies. This was due to damage caused by the storm.

Most homeowner policies don’t cover flood insurance, either in the United States or Canada. The U.S. Government stepped in and covered more than $16 billion in damages caused by the floods.

Although New Orleans is the most remembered victim of the tragedy, other states suffered as well. The damage to Mississippi exceeded $20 billion, with almost $14 billion paid out by various insurers. A total of three other states also saw varying amounts of damage from the storm.

The Gulf of Mexico is one of the largest producers of oil in the United States, and there were dozens of offshore rigs in the sea when the storm hit. Nobody on these rigs was hurt from Hurricane Katrina, but there did end up being billions in damage from the storm surge, which insurers ended up having to pay.

For the previous 20 years before 2005, insurance companies in the state of Louisiana collected some $8 billion worth of premiums, resulting in about $1 billion in profits. In just 2005 alone, homeowners insurance claims exceeded $8 billion in the state. At that rate, it’ll take more than a century for these companies to make their money back.

In response, certain insurers did what’s only logical, and refused to insure houses in the state. Many would be unable to stomach another loss like Hurricane Katrina, so they packed up and moved on.

In response, something interesting happened. Instead of a smaller group of insurers having to take on additional homeowners’ policies, other insurers stepped in and expanded into Louisiana. This was partly due to changes made by regulators designed to make the market more attractive, including a new statewide building code.  The state of Louisiana helped as well, upping the limit offered by the Louisiana Insurance Guaranty Association from $150,000 per claim to $500,000 per claim.

As expected, insurance costs in Louisiana are high. Ever since Hurricane Katrina, the state regularly ranks as one of the most expensive for homeowners insurance in the U.S., alongside areas like Florida and Texas, two other states which are often in the path of hurricanes. Additionally, Hurricane Rita, which happened just a few weeks later, didn’t help either. At least costs have been kept under control lately, as the region has been able to stay out of the path of any major storms.

And finally, Katrina led insurers to rethink the way they model certain catastrophic scenarios. Before 2005, it was typically reinsurers who focused on that kind of thing (a reinsurer being a company that, essentially, insures an insurance company). Now, reinsurers won’t take on the risk unless the original insurer has shown it has modeled the possibility of a huge, catastrophic event -- like another Katrina.

Ultimately, the insurance companies in the area reacted as could be expected. They raised rates, made some changes, and tried to better position themselves for when the next storm happens. They ended up losing billions from the storm, but homeowners did end up getting paid. The system worked as designed, which is the important part.

Image Courtesy of Adobe Stock

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