According to an analysis from reinsurer Swiss Re, a repeat of 2005’s hurricane Katrina hitting in an identical manner using today’s exposure values and protective measures, could drive an insured loss close to $100 billion.
The total economic cost of 2005’s hurricane Katrina is estimated at over $225 billion, in 2024 USD.
This compares to five years ago, where Swiss Re said in a similar report, that a repeat of Katrina hitting in an identical manner could drive an economic loss of as high as $200 billion, based on then current exposures.
At the same time, Swiss Re noted that insured losses from Katrina surpassed $100 billion, in 2024 USD.
As previously mentioned, Katrina remains the most expensive natural catastrophe event for the global insurance industry ever, across all perils and regions.
Private insurance companies paid around $66 billion of the loss, based on 1.7 million claims, and an additional $13 billion in oil rig platform claims (both of which in 2024 prices).
“This equated to 11.3% of the US property and casualty insurance industry’s capital in 2005 – the highest share ever recorded. The US Federal Emergency Management Agency’s (FEMA) National Flood Insurance Program (NFIP) covered a further USD 26 billion of flood insurance claims (2024 prices). This was the highest NFIP payout for a single event ever and reflects the unprecedented scale of the storm surge disaster, caused by the catastrophic failure of New Orleans’ levees and the inundation of the coastline,” Swiss Re said.
Swiss Re continued: “In addition to the immediate losses, a key long-term economic consequence of Hurricane Katrina was a shrinking population in New Orleans. Of the 1.5 million persons displaced, many left the region and never returned. The current population of the New Orleans-Metairie Metropolitan Area is 20% lower than the population before Katrina.
“The economic output of the region also fell in tandem. This is the outcome of low resilience: with a protection gap of USD 120 billion in 2024 dollars (53% of economic losses), the economy and society of New Orleans were only partially able to recover from the destruction of the catastrophe.”
Whilst exploring how New Orleans and the re/insurance industry would cope today if an event like Katrina would strike the same area today, Swiss Re states that it would not cause the same level of destruction as it did in 2005.
As the firm explains, this is primarily due to the protective effect of the city’s new flood defences, built to replace those that were destroyed in 2005.
As well as this, the adoption of new building codes in and around New Orleans have also increased the region’s resilience and lowered the physical loss potential.
“However, negative factors also contribute to the lower loss estimate. Most significantly, the decline in population and economic output in and around New Orleans have lowered insurance exposures, decreasing the loss potential,” Swiss Re said.
“Lower loss potential is offset by higher costs of housing, construction and repairs, all of which have outstripped broader US consumer price inflation since 2005. Taking all variables into account, and using Swiss Re’s in-house models and industry exposure database, we simulate that the insured losses from the occurrence of Katrina today would be close to USD 100 billion in 2024 prices – slightly lower than the inflation-adjusted loss of 2005,” the firm continued.
An important factor that Swiss Re also highlights, is how for the re/insurance industry, tropical cyclones represent a volatile and capital-intensive peak peril, having contributed 39% of the insured losses of the past decade, and 37% over the past 40 years.
Several major tropical cyclones hit the U.S. and the Caribbean in the years after Katrina, with Hurricane Ian in 2022 becoming the second-costliest ever, after Katrina.
Furthermore, Swiss Re also noted that adaptation steps are necessary to reduce the exposure and vulnerability of the built environment to hazards including tropical cyclones and thereby reduce the cost of insurance.
After Katrina, the US federal and state governments spent $14.6 billion rebuilding New Orleans’ flood defence systems, with new levees, gates, pumps and floodwalls.
Of course, building codes are a key element of natural catastrophe adaptation strategies.
After Katrina, Louisiana also adopted its first statewide building codes in order to help reduce wind damage, based on the 2006 IBC and IRC, with updates seen since.
In terms of what hurricane Katrina changed for the re/insurance sector, Swiss Re noted that the event showed the insurance industry’s capacity “to absorb even a truly devastating loss.”
“It was also a powerful reminder of the constant evolution of risks as new challenges emerge. Perhaps the key finding was the industry’s understanding of so-called “super cat” effects, the “black swan” (unanticipated) loss-driving factors that contribute to the biggest catastrophe loss events,” Swiss Re continued.
Adding: “In Katrina, the scale of losses from the levee failures was one such super cat effect. This put the insurance industry on alert for similar circumstances, changing the paradigm for catastrophe underwriting, risk management and capital management as events previously considered of a 100-year return period became much more frequent. Since Katrina, super cat effects are now consistently incorporated in disaster risk modelling.”
Additionally, following the aftermath of Katrina, insurers also made improvements to their policy wordings. Prior to Katrina, hurricane modelling was focused only on wind damage, not water-related losses. The same delineation also contributed to improvements within insurance policy wording, a much-needed development following the extensive litigation on wind versus flood claims post Katrina.
“Tropical cyclones, and major hurricanes in the North Atlantic in particular, will continue to pose substantial risk to the US and global industry. That New Orleans today would suffer less damage in a repeat of Hurricane Katrina points to the success of preventive and adaptation measures,” Swiss Re added.
Clearly, a repeat of hurricane Katrina today would also create substantial losses for the reinsurance industry and for insurance-linked securities (ILS) funds, with a meaningful amount of catastrophe bonds also potentially at-risk of paying out as well, as the capital markets would certainly pay its contribution to the recovery from a major storm of this kind.
