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Insurers Retreat From Coasts

Analysts note that seven of the 12 costliest insured disasters in U.S. history occurred in the past two years. At $57.7 billion, private insured losses in 2005 were more than double those of 2004, according to the Insurance Services Office.

Hurricane forecasters predict five major storms of Category 3 or higher in the 2006 Atlantic season, with a chance of U.S. landfall at 81 percent, compared with a 100-year average of 52 percent. In March, catastrophe modeler Risk Management Solutions Inc. raised its estimate of insurance losses this year by nearly 50 percent above pre-2004 baselines for the East and Gulf coasts. RMS, whose estimates are used by insurers to calculate premiums, blamed "higher sea surface temperatures."

Whether global warming is at work or not, damage costs will increase because of rising property values and development. For instance, a direct hit on Miami by Hurricane Andrew that would have cost $60 billion in 1992 would cause $120 billion in damage today because the market value has doubled, the Insurance Services Office estimates.

"In this environment, we think catastrophes that cost $100 billion in insured losses are not hard to envision," ISO spokesman Christopher Guidette said.

In reaction, the National Association of Insurance Commissioners set up a task force this winter to study climate change, while the industry asked the Wharton School of the University of Pennsylvania to analyze the benefits of proposals, said Howard Kunreuther, head of the school's Risk Management and Decisions Processes Center.

Insurers are divided over whether such warnings are more Jeremiah or Chicken Little. As a whole, the industry is coming off some of its best years. It recorded a 12 percent increase in net income after taxes of $43 billion in 2005, despite the storms, according to the Insurance Services Office and Property Casualty Insurers.

What's more, up to half of the Katrina losses -- $38.1 billion -- were borne by overseas firms or reinsurers (insurers for the insurance companies), which say that growing capital markets are shouldering any growing burden.

"Our point is this industry has been very profitable and very resilient in the face of the most significant catastrophic losses -- both terrorist and natural disasters -- ever," said Frank Nutter, president of the Reinsurance Association of America, whose members would be supplanted by federal or state catastrophe funds or reinsurers. "We can't see why there's a case to be made for a government role."

"Let the private sector do its job without extraordinarily complex new government programs," said Eric Goldberg, spokesman for the American Insurance Association, which represents more than 400 property and casualty companies.

But Allstate has poured more than $1 million into a lobbying campaign it calls, enlisting State Farm and retaining former Federal Emergency Management Agency director James Lee Witt and former Homeland Security deputy secretary James M. Loy.

Allstate suffered its first quarterly loss in a decade because of Katrina, $1.5 billion, and its reinsurance costs this year are expected to triple, to $600 million. "Our obligation is to earn a return for our shareholders, not to assume risks from people for a price that is not fair and adequate," said Thomas J. Wilson II, president and chief operating officer.

Supporters argue that the insurance industry has a "breaking point" -- $50 billion or $60 billion, McCarty said -- above which the government must step in to ensure solvency. What's more, they say, the cost of disasters is already affecting consumers by pricing premiums too high and discouraging participation in insurance programs against floods and earthquakes.

For example, 14 percent of Californians have earthquake insurance. About 20 percent of coastal Mississippians had federal flood insurance, Hartwig said. For consumers, changes could offer one-stop coverage for a range of disasters, avoiding gaps in coverage, pricey add-ons or disputes among insurers over which is responsible for losses, said Florida state Sen. Steven A. Geller (D), of the National Conference of Insurance Legislators.

For taxpayers, a coordinated system to accurately price and insure against the risk of disasters would create true market incentives for homeowners, developers and lenders to buy and build stronger and safer homes, cutting the need for politicians to provide aid after a disaster.

After Katrina, for example, the United States is providing rebuilding grants worth as much as $150,000.

"If I'm sitting on the San Andreas Fault and I have the choice of spending $7,000 or $10,000 on earthquake insurance, and I'm watching what's going on in Mississippi," Florida's McCarty said, "why wouldn't I wait for the inevitable to occur and then point my finger to the Gulf Coast and say, 'What happened in Mississippi should happen in California'?"

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