Worst-case scenarios: reinsurers and insurers are taking steps to deal not only with mega-catastrophes, but also with individual catastrophes that might strike at the same time.

AS Hurricane Katrina made landfall on Aug. 29, 2005, three earthquakes struck California. Katrina stole the headlines as the single costliest U.S. hurricane ever, while the earthquakes proved to be fairly minor ones.

"Just because the wind blows doesn't mean the Earth isn't going to move," said Ken Slack, senior underwriter, global property catastrophe, for GE Insurance Solutions. "It's not so much the single peril of an individual event that we're concerned with--the industry has been gearing itself up to be capitalized for a giant catastrophe--but the confluence of events that is a concern."

As with any major catastrophe, insurers will learn from how they handled Katrina and look to use new techniques to prepare for future disasters. They're tweaking underwriting and modeling, as well as exploring new risk transfer solutions, including the need for a federal natural catastrophe reinsurance fund.

But because the market is not in turmoil the way it was after Hurricane Andrew in 1992 and the terrorist attacks of Sept. 11, 2001, some say the industry already is better prepared to handle disasters than it's ever been before.

Hostile Planet

In the insurance world, a catastrophe is an event causing S25 million or more in insured losses. The property/casualty insurance industry handles numerous catastrophes of that size every year, but it also can expect to face a $20 billion loss every 10 to 12 years, usually due to hurricanes, according to the Insurance Information Institute.

Hurricanes are the biggest causes of insured property loss, and the past couple of years have been bad ones. Charley, Frances, Ivan and Jeanne caused $22.9 billion in insured losses in 2004. Katrina, Rita and Wilma struck in 2005, causing $50.8 billion, according to the Insurance Information Institute. And 2006 could be another record-breaking year, according to forecasters.

While some will debate whether the past two hurricane seasons were more severe due to global warming or simply part of a routine cycle--which includes more active periods--there's no debate that even a normal year on planet Earth features many natural catastrophes.

The typical year sees 50 or so volcanic eruptions, 100 potentially destructive earthquakes, 40 to 50 tropical cyclones and "numerous floods, tornadoes, and more tropical storms than we can really keep track of," said Bill McGuire, director of Benfield Hazard Research Centre and Benfield professor of geophysical hazards at the University College London.

One-in-30 people were affected by natural hazards in 2000, but that number is likely to be close to one-in-one by 2050, when few will be able to escape the consequences of climate change, more volatile weather and population growth.

There are more people living in harm's way, said Paul Budde, senior vice president of catastrophe modeling at Benfield.

"There are more people on the earth and more property. So it's more likely to be a significant event today than it would have been 100 years ago," Budde said.

Cluster of Risks

As the concentration of risks has changed, so has the way insurers view them.

"In the early days of my career, accumulation modeling was done on maps on the wall," said Gary Kaplan, chief underwriting officer and head of Zurich North America Commercial's technical center. "We now use PCs and technology and cat models. It started after [Hurricane] Hugo, and took off after Andrew. Every time there's a catastrophe we go back and we learn from the claims we have, learn from the exposures we have, and then we go and improve those models."

Concentration of risk is important because about half of all Americans now live in coastal counties and one-third of the population lives in a potential earthquake area.

"Not only in the U.S., but worldwide, we see a bigger concentration of risk in more exposed regions. People want to live close to the water, and there are more risks there. The more risks there are, the bigger the losses will be," said Matthias Weber, a member of Swiss Re's extended management board.

Insurers worry about such perils as earthquakes, hurricanes, tornadoes, floods and terrorism. Keeping an eye on their concentrations of risk helps them deal with them all, said Jason Schupp, assistant general counsel supporting Zurich's technical center.

Underwriting Changes

As is the case after most catastrophes, insurers and reinsurers took a second look at their underwriting after both of the past two hurricane seasons. In some cases, they used risk transfer to cap and reduce their exposures. For instance, in January, Allstate Corp. said it had signed a new catastrophe aggregate excess reinsurance agreement that will provide $2 billion of coverage in excess of $2 billion in retained losses from storms named or numbered by the U.S. National Weather Service, earthquakes, and fire following earthquakes.

Companies have lowered limits on property business, raised deductibles, added exclusions or restrictions on coverage for certain perils, such as wind, and raised prices, Weber said.

"Insurers are being more conservative in what they are writing. They are excluding certain places in the country or having lower limits there," said Chris Kende, vice chair of the reinsurance practice for the law firm Cozen O'Connor.

While some in the industry may blame the catastrophe modelers for initially underestimating Katrina's damage, many insurers cautioned that the cat models are just one of many tools that insurers use.

"The models only give you so much information, then you have to step back and think what it means for your overall exposure," said Zurich's Kaplan. "But I think the models have gotten better and better over time, and will continue to improve."

Both reinsurers and insurers are also re-evaluating their Probable Maximum Loss, industry jargon for the reasonably expected worst-case loss scenario.

"We as an industry came to the conclusion that what we perceived to be the exposures of the past were too optimistic," Weber said. "PMLs have risen to reflect the growing economy and more exposure."

One change that many insurers made after paying claims from the four major hurricanes that struck Florida in 2004 is to account for the cost inflation of building materials after a catastrophe. So-called "demand surge" was added to many reinsurers' models in 2005.

Also, insurers are asking for more detailed information. For instance, Zurich realized the year a building was constructed makes a big difference on how well it will weather a storm, Kaplan said. "For example, in Florida, we found buildings constructed after 1995 performed much better than those built before 1995."

Zurich is going beyond categorizing buildings into one of six major types by including more details, such as how the foundation's walls are anchored to the building.

"One of the things we believe in is using risk engineering to help prevent the losses from happening," Kaplan said. For instance, during a hurricane, a lot of damage can be prevented if a building's roof stays in place. Roofs constructed with straps to the walls can help.

Federal Backstop Debates

The insurance industry is divided over whether there's a need for the federal government to launch a reinsurance backstop, similar to the Terrorism Risk Insurance Act, for natural catastrophes. Many European countries have government-funded natural catastrophe emergency funds, which are similar to TRIA, although TRIA is designed solely to respond to terrorist attacks.

Allstate and State Farm are supporting a bill before Congress that would establish a federal fund that would offer reinsurance to state and regional catastrophe funds.

"Eight of the 11 most costly disasters in history have occurred in the last four years. We should take notice. We simply cannot as a can-do country stand by and do nothing," Edward Liddy, Allstate Corp.'s chief executive officer and chairman, said during a presentation at the National Press Club in Washington in January. "Can the insurance industry handle what just occurred at the Gulf Coast? The answer is no. These kinds of large-scale events are unpredictable. There's not enough money in the system to handle these large-scale events."

Weber of Swiss Re disagreed. "The industry as a whole is able to handle very, very, very big events. This does not mean that every company will survive extreme events. Some companies have disappeared in the past, and this will happen in the future," Weber said.

While the industry was too optimistic in its use of cat models in the past, natural catastrophes are quantifiable--unlike terrorism events, Weber said.

Other industry leaders, including Brian O'Hara, chief executive officer of XL Capital, also have spoken against the need for a federal natural catastrophe fund. "I'm a big believer in a free market and the ability of the capital markets to move quickly with solutions," O'Hara said at a round table in New York. "I'm always wary of the government involved in any solution."

Schupp of Zurich said there is a place for broader risk transfer for mega-catastrophes such as a nuclear attack by terrorists, and the government is "clearly the vehicle for that to occur."

He noted there are a variety of conceptual proposals but the details of any proposal are critical to evaluating viability. "It's a process that will take awhile to work through," Schupp said.

Greater Risk, Greater Opportunity

As is often the case with the insurance industry, many leaders say they see greater opportunity coming with the greater risks they face.

"I look at '04 and '05, and I always say to my troops, the Chinese character for catastrophe is also opportunity," O'Hara said at a conference in New York.

More risks in the world mean more potential business. "More insurance is being bought, and more reinsurance is being bought," Weber said. "I think that will continue."

--David Dankwa contributed to this article.

Key Points

* The typical year includes 50 or so volcanic eruptions, 100 potentially destructive earthquakes and 40 to 50 tropical cyclones.

* Insurers can expect to see a $20 billion event every 10 to 12 years.

* Insurers are working to improve their underwriting, concentration of risks and use of modeling to prepare for the possibility that more than one catastrophe will strike at once.

The Day After Tomorrow

You want a good scare? Try talking with Bill McGuire, director of Benfield Hazard Research Centre and author of Surviving Armageddon." Solutions for a Threatened Planet. He'll tell you about extreme risks that insurers are tracking, such as:

* In the Canary Islands, a giant volcanic rock about the size of Manhattan is poised to slide into the Atlantic Ocean. When it falls, it will create a giant tsunami which will race across the ocean. Six to 12 hours later, waves as high as a five-story building could strike the length of the U.S. East Coast and the Canadian Maritimes.

* In Yellowstone National Park, a volcanic crater that's been silent for thousands of years could awaken. It's always restless, but that does not mean there's an eruption on the way. There could be one in 10 years, or it could be 100,000 years. But when it does erupt, the force of the eruption could be enough to obliterate 10,000 square-kilometers around the park. Ash could pile up knee deep in areas more than 900 miles away.

* A giant asteroid, a quarter-mile wide, is spinning toward Earth. In 2029, it will come close enough to pass through the orbits of some of the satellites that circle the planet. If the asteroid is captured by the Earth's gravitational pull, it could be knocked off its orbit, and when it next returns to Earth on Feb. 13, 2035, it could strike the planet with an impact strong enough to obliterate a New England state.

The situations all sound like plots to Hollywood movies. But they are more than potential doomsday scenarios--they're real risks that scientists are studying.

"These extreme events can range from something that happens every 100 years to several thousands or even tens of thousands of years. The bigger the gap, the worse they are ... and the less likely to happen, but totally catastrophic for the whole planet if they do" said McGuire.

For instance, could insurers handle a major earthquake causing $4.3 trillion in losses to Tokyo, another possible scenario?

"The issue there isn't the direct impact on the insurance industry, which would be pretty awful, but the threat of the collapse of the global economy. How does the insurance sector survive?" McGuire said.

Or consider the fault lying off the West Coast, which is very similar to the one off the north coast of Sumatra. When a magnitude 9 earthquake (measured on the Richter scale) struck the Sumatra fault in December 2004, it caused a devastating tsunami that killed more than 200,000 people.

Think that can't happen to the United States? It already has. In 1700, the Casadia fault tore apart in a magnitude 8 or 9 quake that resulted in a tsunami that struck the United States, and even killed people across the Pacific in Japan.

So the question becomes: Are we ready for these mega-catastrophes?

"This is a very well-known hazard," McGuire said of the threat of a tsunami in the Pacific Northwest. "We have [tsunami] measurements down the West Coast. Yet we had a magnitude 7 earthquake in California in December. Tsunami warnings went off, and hardly any [people] paid any attention. It doesn't bode very well for when the very big one will happen. It's amazing: People don't think that things will happen to them."

As for the threat of a tsunami striking the East Coast--from that Manhattan-sized rock on La Palma, an island in the Canaries--McGuire said the National Oceanic and Atmospheric Administration is establishing sensors along the East Coast to pick up warnings of a tsunami. "If the tsunami was 10 to 20 meters high, you'd be talking trillions in terms of dollars in losses," McGuire said.

But McGuire says he has no problems sleeping at night. "These things could happen next year, but it could be a hundred years. It could be a thousand," he said.

While insurers are aware of the potential for catastrophes of this magnitude, they aren't building such risks into their modeling or underwriting, said Kevin Campion of Benfield, a broker.

"We are aware of these types of scenarios, a geophysical event that would cause a very big disaster. But it's an extremely low likelihood of happening, maybe once in a few thousand years or 10,000 years, if ever" said Matthias Weber, a member of Swiss Re's extended management board.

McGuire, the father of a 2-year-old boy, is most concerned about climate change and predicts the world will look quite different by the time his son is a grown man. "Climate change is accelerating. It's incredible. The picture looks worse and worse almost day by day," McGuire said.

The worst piece of news is that the Gulf Stream has slowed by 30% since 1990.

"The Gulf Stream is the only thing that's keeping Britain and Europe warmer than the Antarctic," McGuire said. "It's the scenario from the movie The Day After Tomorrow. Without the Gulf Stream, the whole north Atlantic would be much colder. There would be devastating ice storms and blizzards; it would have a huge effect on the economies of countries, particularly in Europe."

The Earth is getting warmer and as it does, there are likely to be more violent storms, he said. Humans have been responsible for most of the change. Greenhouse gases have risen as much since 1970 in terms of concentration in the atmosphere as they rose between the Industrial Revolution and 1970. Eight of the 10 hottest years on record occurred in the past decade, with Northern Hemisphere temperatures rising a huge 0.4 degrees over that period, compared to a 0.6 degree rise in global temperatures in the past 100 years. They are estimated to increase by 1.4 degrees to 5.8 degrees in the 21st century.

The Kyoto Treaty, which calls for nations to reduce greenhouse gas emissions to 6% less than 1990 levels, is much too little too late, McGuire said. "We need 60% cuts, at least," he said.

He credits insurers with being more familiar now than before with potential mega-catastrophes, but said he's "not convinced the industry is involved enough in getting its weight behind climate change initiatives. There's a long way to go before the insurance industry starts kicking up a fuss about climate change."

Are You a Master of Disaster?

Think you know a lot about catastrophes? Take this test to find out how much you really know!

1. In March 1964, an earthquake measuring 9.2 en the Richter scale struck Alaska. Which of the following occurred as a result:

A) Huge fissures that raised and lowered structures as much as 10 feet

B) Massive landslides

C) Waves as high as 65 meters at Valdez Inlet

D) All of the above

2. In which state was the epicenter for the strongest earthquake ever to strike the continental United States?

A) Missouri

B) Washington

C) Oregon

D) California

3. How many states in the United States face the threat of hurricanes?

A) 5

B) 10

C) 15

D) 20

4. What percentage of homeowners in California have purchased optional earthquake coverage?

A) 7%

B) 14%

C) 28%

D) 42%

5. Four hurricanes struck Florida in 2004. How many homes were damaged?

A) One in every 20

B) One in every 10

C) One in every 5

D) One in every 2

6. In 1812, a strong earthquake struck the New Madrid Fault System, which lies in the Mississippi River Valley. Which of the following happened:

A) Church bells rang in Boston more than 1,000 miles away

B) Forests were leveled

C) The course of the Mississippi was temporarily reversed

D) All of the above

7. True or False: The cost to recover from Katrina will probably exceed what America spent on the Marshall Plan to rebuild Europe after World War II.

8. True or False: Charleston, S.C., has been hit by a 7.1 magnitude earthquake.

9. True or False: The U.S. Geological Survey and the Southern California Earthquake Center released a study in May 2005 warning that an earthquake on the Puente Hills fault under Los Angeles could kill 18,000 people and cause $250 billion in property damage.

10. True or False: In 1938, a Category 5 hurricane struck Long island and New England, killing an estimated 600 people and causing $300 million in damage (in 1938 dollars).

How did you do? 1-3 right: You need a remedial course in catastrophes; 4-6 right: Not too bad, but catastrophes aren't your strong point; 7-9 right: Way to go! You know a lot about catastrophes! Perfect Score of 10: You are truly a Master of Disaster!

Key: 1.) D; 2.) A; 3.) D; 4.) 8; 5.) C; 6.) D 7.) True 8.) True 9.) True 10.) True

Source of Data: ProtectingAmerica.org

Catastrophes With More Than $1 Billion in Insured
Losses in Inflation-Adjusted Dollars Since 1949

Catastrophic losses will continue to rise as population density and
development keep increasing, even if the frequency and severity of
events remained the same.

Year   Catastrophe Name                                 Actual Loss

2005   Hurricane Katrina, Wind, Tornadoes, Flooding   $38,111,000,000
2005   Hurricane Wilma, Wind, Tornadoes, Flooding       8,418,000,000
2005   Hurricane Rita, Wind, Flooding                   4,976,200,000
2005   Hurricane Dennis, Wind, Tornadoes, Flooding      1,115,000,000
2004   Hurricane Charley, Wind, Tornadoes, Flooding     7,475,000,000
2004   Hurricane Ivan, Wind, Tornadoes, Flooding        7,110,000,000
2004   Hurricane Frances, Wind, Tornadoes, Flooding     4,595,000,000
2004   Hurricane Jeanne, Wind, Tornadoes, Flooding      3,655,000,000
2003   Wind, Hail, Tornadoes, Flooding                  3,205,000,000
2003   Hurricane Isabel, Wind, Flooding                 1,685,000,000
2003   Wind, Hail, Tornadoes, Snow, Ice, Freezing,      1,605,000,000
         Flooding
2003   Cedar Fire, California                           1,060,000,000
2003   Fire, California                                   975,000,000
2002   Wind, Hail, Tornadoes, Flooding                  1,675,000,000
2001   Fire, Explosion 9/11 Terrorism                  18,778,500,000
2001   Tropical Storm Allison, Wind, Flooding           2,500,000,000
2001   Wind, Hail, Tornadoes, Flooding                  2,200,000,000
1999   Hurricane Floyd, Tornadoes, Flooding             1,960,000,000
1999   Wind, Hail, Tornadoes, Flooding                  1,485,000,000
1998   Hurricane Georges, Tornadoes, Flooding           2,955,000,000
1998   Wind, Hail, Tornadoes                            1,345,000,000
1996   Hurricane Fran, Tornadoes, Flooding              1,600,000,000
1995   Hurricane Opal, Tornadoes, Flooding              2,100,000,000
1995   Wind, Hail, Tornadoes                            1,135,000,000
1995   Hurricane Marilyn, Tornadoes, Flooding             875,000,000
1994   Fire, Northridge Earthquake, California         12,500,000,000
1994   Wind, Ice, Flooding                                800,000,000
1993   Wind, Hail, Tornadoes, Freezing, Ice, Snow       1,750,000,000
1992   Hurricane Andrew, Tornadoes, Flooding           15,500,000,000
1992   Hurricane Iniki, Flooding                        1,600,000,000
1992   Los Angeles Riots, Riot, Vandalism                 775,000,000
1992   Wind, Hail, Tornadoes                              760,000,000
1991   Oakland Fire, California                         1,700,000,000
1989   Hurricane Hugo, Tornadoes, Flooding              4,195,000,000
1989   Loma Prieta Earthquake, California                 960,000,000
1983   Wind, Snow, Freezing                               880,000,000
1983   Hurricane Alicia, Tornadoes, Flooding              675,520,000
1979   Hurricane Frederick, Tornadoes, Flooding           752,510,000
1974   Wind, Hail, Tornadoes                              454,364,450
1970   Hurricane Cecelia                                  309,950,000
1965   Hurricane Betsy                                    515,000,000
1950   Wind Event North East and Mid West                 174,000,000

                                                        Inflation-
                                                         Adjusted
Year   Catastrophe Name                                    Loss

2005   Hurricane Katrina, Wind, Tornadoes, Flooding   $38,111,000,000
2005   Hurricane Wilma, Wind, Tornadoes, Flooding       8,418,000,000
2005   Hurricane Rita, Wind, Flooding                   4,976,200,000
2005   Hurricane Dennis, Wind, Tornadoes, Flooding      1,115,000,000
2004   Hurricane Charley, Wind, Tornadoes, Flooding     7,728,255,691
2004   Hurricane Ivan, Wind, Tornadoes, Flooding        7,350,889,359
2004   Hurricane Frances, Wind, Tornadoes, Flooding     4,750,680,254
2004   Hurricane Jeanne, Wind, Tornadoes, Flooding      3,778,832,716
2003   Wind, Hail, Tornadoes, Flooding                  3,401,828,804
2003   Hurricane Isabel, Wind, Flooding                 1,788,480,978
2003   Wind, Hail, Tornadoes, Snow, Ice, Freezing,      1,703,567,935
         Flooding
2003   Cedar Fire, California                           1,125,097,826
2003   Fire, California                                 1,034,877,717
2002   Wind, Hail, Tornadoes, Flooding                  1,818,385,214
2001   Fire, Explosion 9/11 Terrorism                  20,708,306,324
2001   Tropical Storm Allison, Wind, Flooding           2,756,916,996
2001   Wind, Hail, Tornadoes, Flooding                  2,426,086,957
1999   Hurricane Floyd, Tornadoes, Flooding             2,297,647,059
1999   Wind, Hail, Tornadoes, Flooding                  1,740,819,328
1998   Hurricane Georges, Tornadoes, Flooding           3,540,561,350
1998   Wind, Hail, Tornadoes                            1,611,524,540
1996   Hurricane Fran, Tornadoes, Flooding              1,991,586,998
1995   Hurricane Opal, Tornadoes, Flooding              2,691,141,732
1995   Wind, Hail, Tornadoes                            1,454,498,031
1995   Hurricane Marilyn, Tornadoes, Flooding           1,121,309,055
1994   Fire, Northridge Earthquake, California         16,472,672,065
1994   Wind, Ice, Flooding                              1,054,251,012
1993   Wind, Hail, Tornadoes, Freezing, Ice, Snow       2,365,224,913
1992   Hurricane Andrew, Tornadoes, Flooding           21,576,265,146
1992   Hurricane Iniki, Flooding                        2,227,227,370
1992   Los Angeles Riots, Riot, Vandalism               1,078,813,257
1992   Wind, Hail, Tornadoes                            1,057,933,001
1991   Oakland Fire, California                         2,437,665,198
1989   Hurricane Hugo, Tornadoes, Flooding              6,607,125,000
1989   Loma Prieta Earthquake, California               1,512,000,000
1983   Wind, Snow, Freezing                             1,725,542,169
1983   Hurricane Alicia, Tornadoes, Flooding            1,324,588,916
1979   Hurricane Frederick, Tornadoes, Flooding         2,024,314,091
1974   Wind, Hail, Tornadoes                            1,799,946,797
1970   Hurricane Cecelia                                1,560,134,923
1965   Hurricane Betsy                                  3,193,000,000
1950   Wind Event North East and Mid West               1,410,049,793

Source: Insurance Services Office

U.S. Catastrophes:
25 Largest Insured Property Losses Since 1949

Ranked by losses restated into 2005 dollars
($ Billions)

Hurricane Katrina (2005)                              38.1
Hurricane Andrew (1992)                               21.6
9/11 Terrorism (2001)                                 20.7
Northridge Earthquake (1994)                          16.5
Hurricane Wilma (2005)                                 8.4
Hurricane Charley (2004)                               7.7
Hurricane Ivan (2004)                                  7.4
Hurricane Hugo (1989)                                  6.6
Hurricane Rita (2005)                                  5.0
Hurricane Frances (2004)                               4.8
Hurricane Jeanne (2004)                                3.8
Hurricane Georges (1998)                               3.5
Wind, Hail, Tornadoes, Flooding (2003)                 3.4
Hurricane Betsy (1965)                                 3.2
Tropical Storm Allison (2001)                          2.8
Hurricane Opal (1995)                                  2.7
Oakland Fire (1991)                                    2.4
Wind, Hail, Tornadoes, Flooding (2001)                 2.4
Wind, Hail, Tornadoes, Freezing, Ice, Snow (1993)      2.4
Hurricane Floyd (1999)                                 2.3
Hurricane Iniki (1992)                                 2.2
Hurricane Frederick (1979)                             2.0
Hurricane Fran (1996)                                  2.0
Wind, Hail, Tornadoes, Flooding (2002)                 1.8
Wind, Hail, Tornadoes (1974)                           1.8

Source: Insurance Services Office