05 Jul 5 major Changes in P&C Insurance Since Hurricane Katrina
By Jayleen R. Heft, PropertyCasualty360.com
In the early morning hours of August 29, 2005, Hurricane Katrina struck the Gulf Coast of the
United States, resulting in more than $41 billion in insured property damage, with total economic
damage topping $100 billion. The fallout from Katrina has led to significant changes within the
insurance and risk management industry.
According to the Marsh report, “10 Years After Hurricane Katrina: Lessons in Preparedness,
Response, and Resiliency,” changes over the past 10 years in the property and casualty insurance
industry were all influenced by Hurricane Katrina, as well as Hurricane Ike and Superstorm
Sandy. The report reviews how property insurance, claims, analytics, risk engineering, and crisis
management have changed since Katrina—and explains what has been learned from Katrina and
other disasters about protecting people, property, and profits.
Here are 5 major changes in the P&C insurance industry that are a direct result of Katrina’s
immense destruction and shocking aftermath.
1. Catastrophe (CAT) modeling has been widely adopted in the insurance industry
Katrina brought about a major change in thinking about CAT modeling. At the same time,
changes in technology and analytics have allowed for advances in CAT modeling practices and
procedures. CAT modeling and analytics, once the domain of reinsurance buyers, have since been
widely adopted in the insurance industry.
Related article: What’s the most critical piece of data for property risk modeling? Hint: It’s pretty
Before Katrina, the modeling of catastrophe exposures was typically done on aggregate
portfolios for reinsurance purchasing. Modeling was a “nice to have” item, and was not considered
from a per-risk standpoint. Since Katrina, CAT modeling has generally been used on a per-risk basis.
Today, virtually every risk with catastrophe exposure is run through one or more models
to consider potential loss scenarios. For an insured, understanding CAT exposures is a key to
negotiating with insurers.
Katrina has also led to a sharp rise in the focus on data quality that has since become a driver
of risk modeling. Initial loss estimates from Katrina missed the mark by a longshot, in part, because
the data loaded into the models was inadequate, incomplete, inaccurate, or miscoded.
Katrina also led CAT modeling companies to revise their models and update their
assumptions. Models in use pre-Katrina had looked at probable maximum losses (PMLs) and average
annual losses (AALs). It became apparent post-Katrina that AALs were understated.
Related: What’s the most critical piece of data for property risk modeling? Hint: It’s pretty basic.
2. Claims disputes have led insurers to tighten policy wording
One of the lessons learned from Hurricane Katrina is the importance of understanding what
your insurance policy says and how it will respond to a claim. Katrina claims disputes led insurers to
tighten their policy wordings, particularly around the flood peril.
After Katrina, many businesses were surprised to learn that, despite having windstorm
coverage, they weren’t covered for storm surge—responsible for most of the damage in New Orleans
and surrounding areas.
Since Katrina and Sandy, the use of named-storm or windstorms with storm-surge clauses
have become more common, and coverage limits and how deductibles are applied have changed
dramatically. There is more clarity now on risk transfer than before Katrina.
Related article: Read your forms
3. Commercial policyholders now develop closer relationships with claims teams
Post-Katrina insurers’ claims departments generally have become more visible. Commercial
policyholders are now encouraged to develop closer relationships with claims teams. Catastrophe
loss management is becoming more of a topic of discussion pre-loss, along with protocols on funding
claims. The end result has been a general improvement in insurers’ ability to fund payments and to
make partial payments following catastrophe losses.
Related article: How to make repairs and rebuild wisely following storm damage
4. Risk engineering has a renewed focus
Katrina increased awareness of the risks associated with property locations. Property
risk engineering looks at the design and construction of physical assets for the purpose of better
protecting those properties and the people who occupy them. Katrina forced thousands of businesses
to shut down and New Orleans’ failed flood protections came under scrutiny.
Manufacturers and other businesses started paying closer attention to their proximity to
waterways following Katrina.
Related article: Warming planet may double odds of New York flooding, study says
5. Improvements in crisis management and business continuity planning
There have been changes in both government and private industry disaster planning since Katrina.
For example, the National Response Framework now defines how all federal agencies will respond to
According to a Federal Emergency Management Agency (FEMA) report, two-thirds of
businesses checked and updated their disaster recovery plans after Katrina.
A well-developed crisis management plan, crafted with input from across the organization,
provides an overall framework to prepare for, respond to, and recover from a catastrophe. Diligence
in catastrophe management—including risk engineering, emergency planning that involves regular
exercises, and data-driven risk finance—can improve resilience and accelerate recovery after an event.
Related article: 5 secrets to improving customer service after a catastrophe