How Katrina affected insurance and reinsurance markets - Hurricane Katrina 20th Anniversary Report

How Katrina affected insurance & reinsurance markets

As the largest insured loss in history, Katrina has had a significant influence on the property insurance and reinsurance marketplace. Katrina claims totaled $105 billion in inflation-adjusted 2024 dollars. The storm changed underwriting and claims practices, and inspired product innovations.

Loss severity is a major factor in insurance market cycles. The property insurance market hardened after the trio of major hurricanes — Katrina, Rita, and Wilma — generated then-record losses. Premiums increased, terms and conditions tightened, and capacity for catastrophe-exposed risks became limited.

Typically, market hardening is initiated by reinsurance companies, and primary insurers, in turn, pass along higher costs of capital to their policyholders at subsequent renewals. The first property reinsurance renewal period after Katrina, Rita, and Wilma occurred in January 2006. That marked a steep uptick in net premiums written, as insurers absorbed higher reinsurance costs. Other years with clusters of catastrophe losses — 2011 and 2017, for example — saw similar spikes in premium.

A strong contraction in insurance capacity for Gulf Coast risks beginning after Katrina led to the launch of several new property insurers in Bermuda. The higher rate environment also attracted capital to the insurance and reinsurance industry. Interest in catastrophe bonds and other insurance-linked securities grew, as did interest in sidecars, special-purpose vehicles designed to support the need for additional capital.

Post-Katrina, underwriters tightened policy wordings and definitions. Asset values came under scrutiny, with insurers focusing on the cost of replacement. Flood exposure and the elevation of scheduled property also got more attention in the underwriting process.

Several changes emerged in insurance claims processes following Hurricane Katrina. These include:

CLAIMS PRIORITIZATION.

This became a standard practice by insurers and loss-adjusting firms after Katrina, due to the high volume of claims. Scaling up experienced adjusters remains a major challenge for insurers following catastrophe events. Insurers and adjusters today strive to quickly match the appropriate level of adjuster with the complexity of a claim, accelerating the lifecycle from first notice of loss to settlement.

ADJUSTER ACCESS.

Road closures and floodwater delayed loss adjusting in the weeks following Katrina, and similar challenges can arise with any catastrophe. Mobile resources, aerial surveillance, and drones have become commonplace tools in surveying damage where human access is limited or deemed unsafe.

ALTERNATE PAYMENT CHANNELS.

Getting claim payments flowing during and immediately after Katrina was difficult due to damaged infrastructure and the evacuation of New Orleans. Online banking and alternative payment systems have made it possible for insurers to issue claim payments to policyholders far more quickly, expediting their recovery.

Parametric solutions proliferate

An innovative form of coverage that evolved after Hurricane Katrina has become a frequent topic of conversation in property risk financing: parametric insurance. Back in 2005, parametric insurance policies existed, but they focused mainly on wind. Katrina put flood peril in the spotlight.

Parametric policies offer a solution for risks that traditional indemnity insurance does not cover. Nonphysical damage business interruption and economic losses can be substantial after a catastrophe. Because parametric policies are triggered by a predefined set of conditions, they can respond to scenarios where physical damage is absent.

Other advantages of parametric insurance include:

Rapid payment. Unlike claims under indemnity policies, which require loss adjusting, once a policy’s parameters trigger coverage, payment can be made quickly, often in mere days.
Scalability. Parametric insurance is designed around a buyer’s budget and can scale to meet needs for more coverage.
Complementarity. A parametric policy complements traditional insurance and can backfill exposures that other parts of an insurance program do not or cannot cover.
Flexible funding. Proceeds from traditional indemnity policies generally must be used for the repair or replacement of insured assets. Funds from a parametric claim, however, can be used for any purpose, including assistance to employees for evacuation and additional living expenses after a disaster.
Inflation hedging. Payouts under traditional property policies are subject to the effects of inflation on construction materials and labor to repair or rebuild properties. Parametric policies, in contrast, are essentially inflation-agnostic and not correlated to exposure values, as payouts are based on predefined triggers rather than actual loss costs.

Understanding return periods

News articles and research papers on natural disasters such as hurricanes and floods sometimes cite phrases such as a “1-in-250-year” or “1-in-1,000-year” event in describing severity. Many people mistakenly believe such numbers refer to the timeframe in which such events will happen.

These are known as return periods and express the probability of an equally severe event recurring. For example, a 1-in-100-year flood — the probability the Federal Emergency Management Agency uses in defining flood zones — is an event that has a 1% probability of occurring in any calendar year. A 1-in-250-year event has a 0.4% chance of occurring in a given year, and a 1-in-500-year event has a 0.2% likelihood. Multiple 1-in-250-year events have occurred in the same year, and this situation has repeated in recent history with clusters of hurricanes in 2017 and 2024.

A 2006 analysis by geoscientists found that a storm of Hurricane Katrina’s intensity or stronger has a 1-in-100-year return period. Using historical hurricane data back to 1899, the analysis found a Katrina-strength hurricane on average can be expected to strike the Gulf Coast somewhere from Texas to Alabama once every 21 years.