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Originally published August 29, 2011 at 8:19 PM | Page modified August 30, 2011 at 9:11 AM

For most Americans, Irene means insurance rate hikes

The $7 billion in estimated losses from Hurricane Irene compounds the vast damage caused by weather this year. Yet, despite billions paid...

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The $7 billion in estimated losses from Hurricane Irene compounds the vast damage caused by weather this year. Yet, despite billions paid out for floods, tornadoes and earthquakes, big insurance companies can expect another profitable year.

And customers can expect higher premiums.

Stocks of major insurers shot up Monday as investors celebrated Irene's less-than-expected damage. Most analysts didn't even adjust their profit estimates for insurers.

In part, that's because insurance companies have been raising premiums this year, particularly for customers in high-risk areas. Homeowner and auto policies cost 5 to 10 percent more than they did a year ago, according to Gregory Locraft, a Morgan Stanley analyst.

The damage from Irene and other disasters means property-insurance premiums likely will increase across the board into 2012, Locraft said.

"Irene is just another log on the fire," he said.

On the plus side, the storm seems unlikely to hurt the overall U.S. economy. Analysts agree damage from Irene likely will run less than $10 billion — a fraction of the $14 trillion U.S. economy.

Reconstruction may even provide a short-term boost for areas hit hard by Irene, analysts said.

Irene is the 10th U.S. weather disaster this year to have caused more than $1 billion in damages, the National Weather Service says — the most in 30 years. And half of the peak hurricane season remains.

Excluding Irene, this year's natural catastrophes had caused about $18 billion in damages to insured properties, according to the Insurance Information Institute. Irene will add $3 billion to $5 billion, said Robert Hartwig, an economist and president of the group.

By contrast, insurers have paid an estimated $40.6 billion on 1.7 million claims for damage from Hurricane Katrina in 2005. Industry losses total $15 billion to $20 billion in a normal year, said Robert Litan, a senior fellow at the Brookings Institution, a Washington think tank.

Regarding the Irene estimate, "that's a significant amount of money, but that is not a major event for the insurance industry," said Franklin Nutter, president of the Reinsurance Association of America. "... The industry's preliminary assessment is that much of the damage was to uninsured properties."

Reinsurance is what insurance companies take out to minimize losses.

Another reason insurers are expected to raise premiums is that reinsurance companies are set to boost their rates Jan 1.

This year, reinsurance hasn't offset insurance companies' costs. Such policies don't kick in until a single disaster's costs to insurers top $10 billion. When billions are spread over numerous disasters, like this year, insurers — and their customers — must absorb the costs.

That, however, won't stop reinsurance companies from increasing their rates — costs that will be passed on to homeowners.

Insurance companies that cover major disasters are set up to absorb big costs. They manage investment portfolios that produce relatively stable income. Most policies never result in claims.

And when a string of catastrophes hits, as in 2011, they can raise premiums.

Insurance companies' profits this year are expected to be modest relative to the vast money they hold in reserve or investment accounts. They must invest safely, to protect against short-term swings in financial markets.

That limits investment returns. To boost revenue, they must raise prices.

Premiums also may rise for commercial-insurance customers, said Al Tobin, national property practice leader at Aon Risk Solutions, part of Aon, which sells reinsurance.

Don Metz, co-owner of Morse, Harwell, Jiles Insurance, a broker in Poplar Bluff, Mo., an area battered by tornadoes and floods this spring, said most insurers he works with have raised premiums as policies have come up for renewal. He said he's noticed premium increases of 10 percent and more.

"More and more, it's going up in the last year or the last two years," Metz said, noting increases used to be only 1 or 2 percent a year.

Aside from higher costs, coverage will become harder to find for people in areas where insurers are sensitive to risks from catastrophes. Few insurers, for example, cover homes on fault lines or near the Gulf Coast, said Robert Rusbuldt, CEO of the Independent Insurance Brokers and Agents of America.

"When it comes to property insurance," Rusbuldt said, "it's all about location."

Disasters overseas, as in Japan, have compounded the financial burdens for insurers, many of which have affiliates abroad.

Hard-hit regions, such as the North Carolina coast, will suffer from lost tourism, in addition to the hurricane's damage and destruction.

The national economy, though, will scarcely feel the impact of Irene.

Rebuilding will be concentrated in relatively small areas and in industries such as construction. The cleanup may create a temporary bump in construction-sector employment, but it won't amount to much. Minuses simply outweigh the pluses.

"I think you get immediate opportunity for cleanup companies and roofers and emergency repairs to buildings and roads ... but in terms of being a net positive for construction overall, no," said Ken Simonson, chief economist for Associated General Contractors of America, the trade group for large contractors. "The major replacement work tends to take a very long time. Going back to Hurricane Andrew and the impact it had on South Florida, the evidence is that it took 10 or 15 years to replace the bulk of the housing destroyed there."

"I think people tend to overestimate the positive economic side of natural catastrophes," he said. "You tend to forget that other businesses are shut down permanently or the projects people wanted to start that they now are not doing. The net impact is always negative, destroying property that had some utility."

Nationally, most economists expect an increase in temporary layoffs and job losses. The economy likely would regain any drop in output or spending by year's end, they said.

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