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The Cost of Insurance
Hurricane Wilma survivors wait for insurance agents at a tent city in Plantation, Fla. The Insurance Information Institute has estimated insured losses from the storm at $7.2 billion, which would make it the fifth-most-expensive hurricane on record.
(By J. Pat Carter -- Associated Press)
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To bolster their case for higher rates, insurers point to National Oceanic and Atmospheric Administration pronouncements that the global climate is about 10 years into a 20 to 30-year cycle of increased hurricane activity. And recent events provide strong support for the claim that insurer are experiencing extraordinary losses.
The Insurance Information Institute, a Washington-based trade group, says insured catastrophe losses in 2005, estimated at $56.8 billion, are the largest ever, twice as big the losses created by four hurricanes in Florida last year, which was itself a record. Seven of the 10 biggest-loss-creating hurricanes in history occurred in the past two summers. And this month's Wilma, costing an estimated $7.2 billion or more, could end up being history's fifth-most-destructive hurricane.
"There's no way an insurer can operate in an environment like that and assume it's business as usual," said Robert Hartwig, an economist with the Insurance Information Institute.
But consumer advocates say insurers perennially use high-profile losses to campaign for higher rates and make enormous profits as a result. The industry has recorded profits of more than $100 billion since the terrorist attacks of 2001, and last year, it recorded profits of $38.7 billion, even after the $27.5 billion loss suffered from the four Florida hurricanes.
Hartwig argues, however, that the key financial measure isn't total profit but the industry's profit as a percentage of its equity, the surplus available to shareholders, which he said lags behind major industries. Amy Bach, executive director of United Policyholders, a San Francisco-based consumer group, also says insurers often reserve large losses for accounting purposes, but then, as claims are settled, pay far less.
"I don't think their exposure on the residential side is going to be nearly what they're saying," she said. "They can reserve until the cows come home, but then they never actually pay."
Insurers are facing their own price hikes from reinsurers, which are expected to pick up at least 40 percent of Katrina-related losses. The reinsurance industry is mostly based offshore and largely unregulated, its prices subject to secretive negotiations with insurance companies. Losses drain the supply of reinsurance available globally, making it more expensive.
Hartwig of the Insurance Information Institute says reinsurers are expected to raise premiums as much as 100 percent on coverage of the highest-risk zones.
Mario P. Vitale, chief executive of the North American unit of Willis Group Holdings Ltd., a large commercial insurance broker based in New York and London, says that in the wake of the hurricane losses, global insurance investors will demand a higher rate of return for the perceived increased risks. That's how property losses on the Gulf can pressure rates across all types of insurance.
"That's real money being paid by real companies to third parties," Vitale said. "The industry needs to right the ship."
