Hurricane Ike Claims Expected to Reach $11 BillionSep 17, 2008 | Parker Waichman LLP With refugees from Hurricane Ike returning to their homes to assess damage, insurance companies are bracing for an avalanche of claims. Some experts estimate that Hurricane Ike could be the third most costly storm in U.S. history, behind Hurricanes Katrina and Andrew
When Hurricane Ike blasted ashore on September 13 as a Category 2 storm, it had sustained winds of 110 miles an hour, and a storm surge as high as 20 feet. Many communities on the Texas Gulf Coast, including Houston and Galveston, sustained significant damage, and flooding was reported as far away as Mississippi. Even as the storm weakened and moved inland, it was still a force to be reckoned with. Damage from high winds and heavy rain was reported as far away as the Midwest and Ohio Valley.
While it could be weeks before the true cost of Ike is known, the Insurance Information Institute's preliminary estimate said the storm could result in more than $11 billion of claims. In addition to being the third most expensive hurricane, it would also be the fifth most expensive insurance event in U.S. history, behind the Sept. 11 terrorist attacks and the Northridge, Calif., earthquake in 1994, the institute said.
The rating service, A.M. Best Company, said that while the cost is expected to be high, insurance claims from Ike are expected to be "manageable given the current overall capital strength of the industry" and won't be an industry-wide "solvency event." Another analyst at Keefe, Bruyette & Woods told the Hartford Courant that while Ike is likely to wipe out third-quarter earnings for some property-casualty insurers that have a material amount of business in the affected area, most companies will report a profit for the full year.
In Texas, there is concern about whether or not the Texas Windstorm Insurance Association, the insurer of last resort for 14 coastal counties, can weather the financial fallout for Ike. According to the Houston Chronicle, the association became the wind damage insurer for hundreds of thousands coastal residents because private-sector companies pulled out of the coastal wind market following Hurricanes Katrina and Rita in 2005.
The Chronicle reports that the association's $100 million base, along with part of a $500 million catastrophic reserve trust fund, were already used up paying for damage caused by Hurricane Dolly and Tropical Storm Edouard earlier in the summer. So it will have to tap its backup funding sources to cover claims from Ike. That ultimately could cost Texas taxpayers.
If past storms are any indication, affected policyholders could have an uphill climb no matter what type of insurance they have. In 2008, the Government Accountability Office (GAO) issued a report that criticized the way the insurance industry handles hurricane damage claims. Following bitter and widespread complaints from some Gulf Coast homeowners about insurance coverage after Hurricanes Katrina and Rita in 2005, the GAO urged better assessment of "the accuracy of flood payments on hurricane-damaged properties." Insurance companies' handling of damage claims from hurricanes, where both wind and water destroy property, needs closer government scrutiny, the report said.