BW online article discusses aftermath of Charley. All sounds pretty complacent, but then no one was looking for a Labor Day weekend mega catastrophe ($50 billion or more?).
NEWS ANALYSIS
By Robert McNatt
Charley Leaves Insurers Undamaged
The hurricane may have devastated lives and property, but insurance outfits can cover claims now much better than after Andrew in 1992
Hurricane Charley, with its 150-plus mile-per-hour winds, has left thousands of shattered lives, homes, and businesses in its path. But property and casualty insurers, which were severely battered by the last great Florida storm, 1992's Hurricane Andrew, look as if they'll fare much better than they did 12 years ago. Back then, the industry had far lower reserves, and Andrew put many smaller insurers in the Sunshine State out of business.
Most analysts and insurance insiders figure that thanks to higher premiums instituted in the wake of Andrew, improved building construction, and the establishment of the Florida Hurricane Catastrophe Fund in 1994, specifically set up by the state to provide reinsurance to companies writing residential policies there, the industry should be able to absorb estimated losses of $5 billion to $10 billion with a minimum of economic pain.
SECURE AND UNFAZED. A more complete picture of total losses won't be known until later this week, when insurers have had more time to assess damages. With power lines and phones out in many areas, some customers are still having trouble contacting their insurers to file claims. State Farm, one of the largest insurers active in Florida said as of Sunday, Aug. 15, it had received claims from 19,454 homeowners and 1,552 automobile owners.
Those numbers are expected to rise. But many of the biggest insurers, such as AIG (AIG ) and Allstate (ALL ), or reinsurers, such as Swiss Re (SWCEY ), declined to give damage or claim estimates.
Cliff Gallant, an analyst at Keefe, Bruyette & Woods in New York, notes that industry reserves right now are around $353 billion -- about two-and-a-half times their size when Andrew hit. Meanwhile, early losses are estimated at half as much. "It's just not the same magnitude," says Gallant. "There will be some loss in the third quarter, but [overall] earnings will still be positive."
Indeed, big insurers' financial state is strong enough that even fears of another Category 4 hurricane don't seem to faze the industry. "If there's another event of the magnitude of Charley, it's likely to be in the realm of what insurers could stand," says Robert Hartwig, chief economist at the Insurance Information Institute.
FUND CUSHION. Both insurers and customers learned from Andrew, which was so devastating in part because at that time no one had actually modeled so powerful a storm pressing into densely populated areas. More often than not, says Hartwig, even small businesses in areas once thought unlikely to be hit by so strong a storm now have business-interruption insurance.
That doesn't cover flood damage. Policies for that are provided separately by the federal government. But most business-interruption insurance will cover lost income from hurricane damage, usually with a two- or three-day deductible.
Also, while Florida's citrus crop will undoubtedly suffer losses, many farmers have crop-insurance policies from the U.S. Agriculture Dept. Consumers, however, may feel the fallout down the road in terms of higher prices for oranges and orange juice.
The state of Florida has mitigated the damage to the insurance industry through the Florida Hurricane Catastrophe Fund. After Andrew made a handful of local insurers insolvent, the FHCF was started to make sure that insurers in the future could pay their claims and stay in business after disasters. By law, any insurer that writes property and casualty (P&C) insurance in Florida has to pay a small surcharge on the policy to the fund, which is used as reinsurance.
RAISING PREMIUMS. To date, says Jack Nicholson, senior FCHF officer, the fund has a cash balance of $5.6 billion, which is expected to rise to $6 billion by yearend. Insurers are also liable for deductibles. Their coverage after that can range anywhere from 45% to 90%. Allstate, for instance, released a statement on Aug. 17 saying it's on the hook for the first $286 million in storm-related losses on its policies and then gets reimbursed for up to 90% of losses up to $922 million.
In addition, the fund, in which 229 companies participate, has an additional bonding capacity of $9 billion, backed by emergency assessments on all P&C policies written in the state. That puts insurers in good standing. "It would take an industry loss of about $10 billion to $11 billion before we triggered bonding," says Nicholson.
Insurers have also been helped out by higher homeowner premiums. In some parts of Florida, says Brian Meredith, an analyst at Bank of America Securities, premiums are double or even triple what they were when Andrew hit. And in the past three or four years, many insurers also changed how they computed premiums. Instead of a flat $500 or $1,000 deductible, for instance, the outfits would make the deductible a percentage of the home's value, so that a deductible of 2% to 5% would shift more of the burden of rebuilding onto the homeowner as a house increased in value.
In short, that set up the fat reserves that the insurers now enjoy and made it unlikely that homeowners will see future premium hikes beyond the inflation rate. "It doesn't appear as if [insurers] could justify substantial price increases beyond that," says Meredith.
BIGGER TURMOIL ELSEWHERE. Furthermore, Andrew exposed the shoddy construction practices of some local homebuilders, so the state dramatically strengthened its building codes in 1994. Already, say experts, the anecdotal evidence suggests that post-1994 homes weathered the storm considerably better than earlier models. Many of the construction methods, such as irons strips that hold roofs to homes, or houses to foundations, added to consumers' costs. But that higher upfront cost has translated to less damage and lower insurance payouts.
Indeed, the biggest storm that has hit insurance companies so far this year hasn't been Charley, but the turmoil in the stock and bond markets. The decline there, if it continues, could end up wreaking more havoc on the industry than Florida's deadly Category 4 hurricane. |
