Sunday, September 14, 2008

Insurers Braced For $25bn Losses From Ike Gains Strength Ahead Of Landfall In Texas

By Miles Costello

Hurricane Ike last night looked set to become one of the most expensive natural disasters the insurance industry has faced, with fears that claims could reach $25 billion (£13.9 billion).

Having already caused up to $200 million of wind and rain damage as it tore through the Turks & Caicos Islands and the Bahamas this week, Ike was expected to make landfall in the early hours of this morning on the US Gulf Coast.

With windspeeds approaching 115 mph, Ike appeared to be growing in intensity, as it headed towards Galveston, Texas - with a potentially catastrophic impact on oil refineries there. The centre of Ike, which has killed more than 80 people across Haiti, the Dominican Republic and Cuba, is expected to come ashore at around 2am local time.

It was upgraded to a Category 3 storm yesterday, after regaining strength in the warm Gulf waters. Deloitte, the consultancy that was among the first to circulate possible damage estimates, has forecast that Ike could cost the insurance industry as much as $25 billion. This would make it the second-most expensive hurricane in history, behind Hurricane Katrina, which resulted in losses to insurers and reinsurers of $68.5 billion in 2005, according to figures from Swiss Re.

“The thing about Ike is that it has reached Category 3 and it looks as if it will make landfall at that level,” Lis Gibson, Deloitte's insurance partner, said. She is one of the first to hazard an estimate, but Ms Gibson's view will carry weight in the industry.

Just two days after the terror attacks of September 11, 2001, she predicted that insurance losses would top $20 billion and the economic costs would touch $100 billion. Swiss Re puts the eventual insurance losses of 9/11 at $22 billion, with economic costs estimated at $110 billion.

Claire Souch, senior director of model management at Risk Management Solutions (RMS), the acknowledged expert in catastrophe damages, said it was too early to be sure, but Ms Gibson's forecast was certainly “within the bounds of possibility”. RMS is expected to put out its initial assessment of the damage over the weekend. Ms Souch said the main cause for concern was inland, rather than offshore. She said that, with strong winds and flooding expected around the coast of Galveston, and the prospect of the storm moving on to Houston, large areas of property were at risk.

“There are hundreds of billions of dollars worth of property in that region,” she said. Ike could inflict further indirect damage on insurers if a surge in demand for repair work means companies in the sector bump up their charges, Ms Gibson said. This so-called demand surge was a feature of the 2005 hurricane season.

“Every insurer will be bracing themselves because it is going to be harder to replace the capital because of the credit crunch,” she said. “If losses start going beyond $50 billion, as an industry that's an issue.”

Insurers and reinsurers have learnt from their experiences with Rita and Katrina in 2005, but their ability to manage their exposures remains untested, she said.

Oil and gas prices rose sharply yesterday as traders predicted energy supplies would be disrupted. The Houston region supplies about one-fifth of the world's oil.

Oil giants including Exxon Mobiland ConocoPhillips began shutting down refineries on Thursday.

One month oil futures rose to $101.49 a barrel for benchmark West Texas light crude during trading on the New York Mercantile Exchange, approaching lows not seen since April.

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