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Confusion amid devastation

Immediately after Hurricane Katrina the insurance industry seemed sure it would cope. But since New Orleans flooded, loss estimates and insurers' liabilities have become confused and some companies have posted worryingly high loss estimates. Reactions assesses the impact.

This article appears courtesy of Reactions

"I am not sure why our shareholders should be paying for this. The legal system should uphold the integrity of the insurance contract."
Patrick Thiele, chief executive of Bermudian reinsurer PartnerRe, on flood risk

On September 13, more than two weeks after Hurricane Katrina first struck, Montpelier Re released its estimated losses from the storm. Its prediction that Katrina will cost it between $450m and $675m is not the biggest individual loss estimate for a reinsurer. But, to date, it is arguably the most shocking. The Bermudian reinsurer has $1.5bn of capital, so if its losses reach the top end of its prediction, they will be equivalent to 45% of its capital base.

Perhaps such large losses should not be surprising. It has been 13 years since Hurricane Andrew caused $22bn worth of insured losses in Florida, and so the industry was arguably due another big loss.

Because of Andrew, insurers and reinsurers are now much better prepared for large catastrophe losses. But the insurance industry has been slow to wake up to the magnitude of Hurricane Katrina.

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