By Martin Wolk Executive business editor
updated 9/22/2005 6:10:12 PM ET 2005-09-22T22:10:12

With powerful Hurricane Rita churning its way toward landfall, the insurance industry is bracing for yet another major financial hit in a year that suddenly has become the worst ever for catastrophic losses.

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The well-capitalized industry has plenty of assets to pay out the projected billions of dollars in damage claims and is expected to come through the hurricane season largely intact, although reinsurance premiums appear likely to rise and a few smaller, mostly regional carriers might struggle to survive.

But the appearance of another menacing hurricane so soon after Katrina underscores the fact that insurers are facing a new cycle of increasingly large, frequent and costly disasters.

“We don’t know the exact cause or reason, but it’s certainly clear when you look at the worst-ever catastrophic event, which it looks like Katrina will be, we’re in a different world, and it’s a much more risky world for catastrophic events,” said Kurt Karl, chief economist for Swiss Re, the giant reinsurer.

The terrorist attacks of Sept. 11, 2001, introduced a new level of man-made risk for insurance companies, and then came last year’s wave of four hurricanes that swept through Florida and other southeastern states, which caused massive property losses.

Even before the impact of Rita -– which is taking aim at the nation’s fourth-biggest city and is expected to cause significant damage -– the devastation left by Katrina means that since the turn of the century the nation’s property and casualty insurers have experienced three of their four worst years on record, each with more than $27 billion in losses from major disasters. That compares with an average of $8 billion a year in disaster-related claims in the relatively quiescent period of 1995-2000.

“The question of whether this is a trend or an anomaly is one that is not yet answered,” said Pennsylvania Insurance Commissioner Diane Koken. “A one-year or two-year impact in the insurance world does not a trend make. It has to be something that continues over a much longer period of time.”

But while damage claims have been outsized over the past several years, man-made and natural catastrophes have been occurring around the world more frequently -– and with greater severity -– since about the mid-1980s, said Karl.

The reasons are not completely understood, although the insurance industry clearly is facing greater exposure especially in the United States because of growing affluence, population and property development along the nation’s coasts, where property is most exposed to the risks of hurricanes and earthquakes.

More than half the nation’s population lives in coastal counties that account for 17 percent of the land mass in the continental United States. The population in these regions, which include many fragile ecosystems and exposed geographies, has grown by 33 million since 1980.

And because of the high demand for property in these areas, home prices in coastal regions have tended to rise much more quickly than in the rest of the country, increasing the exposure to insurance companies. Even after last year’s hurricanes, the price of homes in Florida surged 24 percent in the 12 months ending June 30 according to federal data, compared with 13 percent for the nation as a whole.

“Clearly people do not figure natural disaster risks into their decisions of where to live and where to retire,” said Bob Hartwig, chief economist for the Insurance Information Institute.

The possibility that global warming is contributing to the increasing severity of natural disasters also is being carefully considered by insurance industry executives, regulators and risk management experts.

That theory is categorically rejected by Hartwig.

“Global warming doesn’t have anything to do with these storms we’re seeing,” he said.

He and many others contend the rise in hurricane activity can be explained completely by 20-to-30 year weather cycles that have been observed in the Atlantic Ocean for more than 100 years. After a period of relatively low hurricane activity from 1970 through the early 1990s, cyclonic activity has again increased in intensity and frequency, they point out.

But others in the insurance industry are concerned that global warming could indeed be contributing to the increasing frequency and severity of storms. The National Association of Insurance Commissioners had been scheduled to hear from former Vice President Al Gore on the issue at its fall meeting in New Orleans, which was cancelled, said Koken, the group’s president.

Swiss Re is sponsoring extensive research on the economic and health effects of climate change and extreme weather events being conducted by Harvard Medical School under the auspices of the U.N. Development Program. Results of the two-year study will be released in November.

Regardless of the cause, the insurance industry is financially healthy with some $400 billion in capital and should weather the current season in good shape.

“From a regulator’s point of view the property and casualty companies do have adequate capital and liquidity to withstand significant claims,” said Koken, the Pennsylvania commissioner. “Although there certainly may be some smaller companies, regional companies, that have some financial issues, overall the condition of the industry is very healthy.”

Standard & Poor’s insurance industry analyst Cathy Seifert agreed, pointing out that the first half of 2005 was very profitable for the industry, with few catastrophic losses. In the aftermath of Katrina some insurance company stocks even rose on the theory that the catastrophe would help the industry push through higher premiums.

She said that prospect was uncertain, although Karl, of Swiss Re, said reinsurance premiums appear likely to rise as they did after the 9/11 attacks.

But as devastating as Katrina was with its massive loss of life and property, the insurance industry is partly protected because so much of the damage was due to flooding.  And that means the government will end up footing a much higher percentage of the bill than it typically does after large-scale disasters.

After Hurricane Andrew, for example, the federal government poured in $11 billion for repair and reconstruction, compared with $30 billion in private insurance money in current dollars. After 9/11 the government paid $20 billion, compared with $28 billion for private insurers.

For Hurricane Katrina, Congress already has allocated $68 billion in direct aid and tax breaks, with the total likely to rise as high as $200 billion.

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