January 28, 2013
By Craig Guillot, InsWeb.com
Superstorm Sandy dealt a major financial blow to insurance companies – as much as $20 billion, according to one estimate. Insurers may not be the only ones feeling financial pain, though. Homeowners left in Sandy’s wake could end up paying significantly higher insurance premiums for years to come.
Insurance experts say heavy financial losses, heightened risk and new ways of predicting where hurricanes can strike will leave insurers with no choice but to raise home insurance premiums. As homeowners affected by past disasters in Louisiana, Florida and Texas have experienced, those increases could happen in the next year, possibly as soon as their next policy renewal.
Premiums likely to rise within next year
It’s not uncommon for a region’s insurance rates to spike after a disaster strikes. Richard Bunch, president and CEO of the Woodlands Financial Group, says that although Sandy wasn’t an exceptionally powerful storm, the high concentration of homes in the Northeast led to significant financial losses.
Bunch says it’s almost certain that many homeowners in the affected regions will see large increases in premiums. He points to Louisiana following Hurricane Katrina, Florida following Hurricane Andrew and Texas following Hurricane Rita. In some cases, homeowners saw their premiums go up by as much as 200 percent.
In the area affected by Sandy, home insurance premiums could slowly start rising over the course of the next year as people reach renewal periods on their policies, according to Bunch. He expects rate increases in the Northeast to be “significant,” ranging from 15 percent to 200 percent. The closer a home is to the coast, the more money a homeowner should expect to pay for insurance.
Neil Alldredge, senior vice president of state and policy affairs for the National Association of Mutual Insurance Companies, a trade group, says: “Insurers have become pretty good at identifying the level of risk on the coast versus someone who is five miles from the coast. It can really vary.”
‘Upward pressure’ on insurers
Robert Hartwig, president of the Insurance Information Institute, says home insurance rates have been rising in coastal areas for years. A growing number of storms and more residential and commercial development on the coasts means insurers could be on the hook for more money.
Hartwig says Sandy “will likely add upward pressure to that. Insurers just see more risk.”
Insurers typically raise premiums after a disaster to recover their financial losses and to account for added risk. However, insurance rates in most states are regulated by state insurance departments, so proposed rate hikes won’t be automatic.
Most insurance companies rely on something called reinsurance to cover losses from big disasters. Much like homeowners pay premiums for their insurance, insurance companies pay premiums for reinsurance.
The premium increases that insurers see in their reinsurance policies usually are passed down to customers.
Some insurers whose proposed Sandy-related rate hikes are rejected by state regulators might pull out of a market altogether. They do this by simply halting policy renewals. Other insurers might stop writing new policies and just keep existing clients.
For homeowners who can’t find insurance elsewhere, they can obtain coverage through state-backed insurance pools, although this last-resort insurance comes at a steep price.
Sandy: A new benchmark
Weather experts don’t predict that the Northeast will see a high number of hurricanes in the future. However, Sandy is the second storm like this to hit the region in two years. Bunch says that after Sandy, insurers likely will tweak the way they forecast storms in the Northeast.
Hartwig says every storm is a learning experience about the financial and physical damage that storms can cause. As Sandy victims continue to rebuild, insurers and local authorities probably will establish new building codes so that homes can better withstand storms, experts says.
“Insurers were already aware of the risk of hurricanes in New York and New Jersey, and they were prepared for it,” Hartwig says.