December 15, 2005
Will hurricanes puff up insurance rates here?
By SHANE C. SULLIVAN
Cascade Risk Placement
The big hurricanes have passed, but the battle over insurance rates and coverage for owners is just beginning.
So, how much do insurance losses in one part of the country affect insurance costs in another? We are about to find out just how global our economy is with the recent impact of major hurricanes causing significant damage to the Southeast U.S.
Insurance industry executives have warned of significant rate increases following the hurricane losses. They insist their reinsurance costs will increase sharply upon renewal of the January reinsurance treaties.
When any large catastrophic event causes significant losses, insurance companies by law must move money from their capital base, known as surplus, to a reserve account large enough to pay anticipated claims.
What will the insurers do?
We all saw significant increases in insurance costs after the Sept. 11 attacks, so should we expect to see those same increases due to hurricanes?
Insurance companies will typically seek out higher insurance renewal rates to accommodate the lost capital and replenish the surplus to pay future claims. Insurance companies will also pass along the increased cost of their insurance safeguard, known as reinsurance.
The record-setting hurricane season of Katrina, Rita and Wilma has drastically altered the way insurance companies will set pricing for this and the next several years.
By law, insurance rates are set by state insurance commissioners, who must approve company rates. Rates must be set for "future" anticipated loss activity. Insurance companies will typically use previous loss activity as a gauge for future claims.
How do the losses rank?
Insured catastrophe losses in 2005, estimated at $56.8 billion, are the largest ever twice as big as the losses created by four hurricanes in Florida the previous year, itself a record. Seven of the 10 biggest insurance-claim-related hurricanes in history occurred in the past two years.
Insurance companies often point to high-profile loss activity to ease the process of rate increases across the industry. Insurance companies are going to experience rate increases from their reinsurers and those costs will be passed along to consumers.
The impact on local owners
We should expect to see rate increases for many real estate clients across the nation, with double-digit increases and more in coastal regions due to a lack of availability of coverage. Clients in the West and specifically Northwest regions should expect to see slight increases or rates holding firm if loss activity has been low. They otherwise would have experienced further reductions in cost again this annual term.
Of all the insurance costs most real estate owners and managers pay, property insurance is the most expensive line item. Costs for catastrophic coverage lines (earthquake, flood and hurricane) will see a significant correction in the market primarily due to the lower levels of capacity available.
What can owners do?
Many insurance agents will need to restructure their current insurance placements for a more cost-effective result. The traditional placements and typical markets many clients have become accustomed to using may no longer be available this renewal cycle.
Alternative coverage and deductible options should be investigated to offset potential cost increases. Deductible funds, risk purchasing groups, captives and other options could help in this difficult time.
The insurance marketplace is rapidly changing and clients should be sure to work with insurance agents and brokers that have expertise within their industry class. If your firm typically works with an agent that does not focus on real estate risks, hire an insurance consultant to offer advice on market placement, market access and coverage concerns.
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