Insurers face shock hurricane bills rise

Insurers will have to pay out many billions of pounds more than expected for claims from the last hurricane season, two leading players warned today.

Amlin and Omega, Lloyd's of London insurance firms, said that Hurricane Ike in particular could prove to be one of the most expensive storms ever.

The warning will raise fears for the future of the weaker insurers, which have already seen their capital devastated by tumbling stock markets.

With investment returns low, insurers are buffeted from all sides. The credit crunch is making it unusually difficult for them to replace eroded capital.

Hurricane Ike smashed into the Texas Gulf Coast last month, covering a wider area than forecasts had suggested. Hurricane Gustav hit Louisiana in early September, but was not as bad as feared.

Analysts so far expect losses from both to reach $30 billion (£17 billion).

Omega said: "Based upon information that Omega is receiving from insureds, cedants, brokers and agents, it seems most probable that the losses will ultimately be materially larger than these figures."

Amlin said the higher claims are due to "the far-reaching impact of the storm both on offshore energy installations and on the mainland".

Forecasts for returns this year are slashed in what amounts to a profit warning from both firms.

Omega said it will take a hit of $34 million, though this could rise as it is "still too early to have definitive information on claims". Amlin said its profits for the year will be £45 million lower than previously hoped.

Amlin overwhelmingly invests the premiums it takes from customers in bonds and cash, meaning it is protected from the worst ravages of the stock market. But its £2.6 billion of investments are returning just 0.4%, the downside of its prudent approach. Omega did slightly better, making a 2.7% return on its holdings this year.

There is now a strong likelihood of a dramatic shake-out, with weaker firms going bust or being taken over. Analysts fear even the strongest players may need to raise cash from investors.