Upfront: An Ill Wind For Insurance Premiums

Insurance losses caused by Hurricane Katrina are certain to prompt a spike in premiums. Now government and industry begin the debate about developing risk pools for future catastrophes.

For businesses that purchased or renewed property and casualty coverage over the last several years, insurance premium rates have been favorable. According to Aon's 2004 U.S. Property Report, "a combination of improved investment returns for insurers and increased capacity -- together with an absence of catastrophic losses in 2003 -- has resulted in an average 10 percent reduction in premiums for buyers of commercial property insurance."

But as the old saying goes, that was then, and this is now. Hurricane Katrina will probably be responsible for the largest overall property loss ever recorded in the global property reinsurance market, and premium increases are likely. Although it's too soon to get a hard and fast grip on the cost of Katrina, estimates of insured losses range from $14 billion to $35 billion, excluding losses related to flooding.

"The impact of this event on the global reinsurance marketplace will most seriously affect the pricing and availability of business insurance following January 1, 2006," says Daniel J. McCutcheon, executive vice president and COO of Lyons Companies, a risk management consulting firm based in Wilmington, Del. "U.S. insurance companies, who look to the European and Bermuda marketplace for annual reinsurance treaties, will see restrictions in terms and conditions and a significant increase in premiums. Those premium increases and coverage restrictions will be passed along to U.S. customers. Reinsurers are currently estimating losses in the billions and will be seeking to offset those losses with future premium increases."

But Hurricane Katrina can't shoulder all the blame for rate hikes. "We are witnessing increasing natural catastrophe events across the globe, affecting economies and societies with a higher frequency and severity," says John Coomber, CEO of Swiss Re, a global reinsurer headquartered in Zurich, Switzerland. "Price levels in the upcoming renewals must be adjusted to reflect these developments."

Attorneys retained by companies to assist them with insurance claims believe rate increases will come regardless of the amount of losses sustained by the insurance industry. "We expect that property and casualty insurers will raise the rates for businesses as a result of Hurricane Katrina," says Scott P. Stolley, partner in the Dallas-based law firm Thompson & Knight LLP. "Many insurers used 9/11 as an excuse to increase their rates, and as a result, those insurers had record years in 2002. We anticipate that insurers and reinsurers will behave the same way after Hurricane Katrina."

Alfred J. Kuffler, a partner with Montgomery, McCracken, Walker & Rhoads LLP, a Philadelphia-based law firm, concurs: "Given the commentary regarding the impact of Katrina on the insurance markets, rates will increase, and the coverage will become more restrictive. That always is the pattern."

Some insurance brokers take a more sanguine view of premium increases. "Insurance rates in the regions affected by Hurricane Katrina may see an increase based on projections of future storms, but it is unlikely that premiums in other regions will be affected because rates are set based on individual states and must be approved by state departments of insurance," says David Stafford, CEO of We Speak Insurance, a bilingual insurance network based in Gilbert, Ariz. "On the other hand, rates could increase nationwide based on the percentage of damage caused by flood vs. wind and rain. Typically, companies pay for flood damage through a separate policy that can be purchased through the National Flood Insurance Program (NFIP)."