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Thursday, Mar 28, 2024
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Hurricane Could Lead To Insurance Rate Hikes

Hurricane Katrina’s effects on the San Diego insurance market are largely unknown, say local industry members and regulators.

San Diegans can relax about their insurance rates skyrocketing because of the hurricane, though, according to the California Department of Insurance, which regulates the state’s $106 billion industry.

That’s because state law prevents insurance companies here from increasing Californians’ rates to recoup costs from claims filed due to events in other states, the department said. Insurance companies in California ideally keep a surplus for this purpose, the department said.

At least that’s how the system “should work,” said Alan Gin, a University of San Diego associate economics professor, who produces a monthly report on the local economy called the Index of Leading Economic Indicators for San Diego County.

“It would be difficult to tell why they’re raising rates,” Gin said. “But you can be sure that if there is a significant increase, the insurance commissioner’s office will ask the insurance companies to justify what they have done.”

Hurricane Katrina, which ravaged the Gulf Coast about a month ago, could cost insurance companies private insurers $40 billion to $60 billion, according to Risk Management Solutions, a Newark-based company that assesses catastrophic occurrences to help companies maximize profits.

Norman Williams, the assistant deputy commissioner at the California Department of Insurance, said a “significant number” of insurers in San Diego County do business with customers where the storm hit in New Orleans and other towns along the Louisiana, Alabama and Mississippi coastlines.

Total economic losses from the storm and the flood that followed are now estimated at $125 billion, according to the New York-based Insurance Information Institute, making the category five storm the most expensive hurricane in America’s history.


Not A Catastrophic Blow

Carole Lovell, a spokeswoman from Oldwick, N.J.-based A.M. Best Company, one of the world’s oldest insurance rating agencies, said preliminary estimates the company is receiving from insurance companies show “virtually all rated companies will be able to meet their commitments, despite the projected magnitude of the potential losses.”

A.M. Best recently announced “the overall strength of the industry will not be significantly weakened.”

Even so, industry executives say it’s too early to tell how much the hurricane might impact San Diego’s insurance market.

State Farm Insurance Co. set up two temporary call centers in California , one in Bakersfield and another in Rohnert , to field the large number of calls about hurricane claims. Through mid-September, the two centers had answered nearly 18,000 calls.

A spokesman for the company’s California offices, Mike Rossman, said State Farm believes it will be able to pay the large number of expected claims with help from its reserve. However, he said, it’s too early for the company to estimate even a running tally of the dollar amount of claims from Katrina.

Illinois-based State Farm is the nation’s largest property and casualty insurer with more than 1,000 agents in California.

“The claims process is so long, and each one has to be evaluated on an individual basis,” Rossman said.

State Farm has 2,600 adjusters waiting to evaluate damage in areas affected by the storms, he said.

Mike Downing, a vice president in the San Diego office of Des Moines, Iowa-based Principal Financial Group, said the company will likely see claims from the hurricane filed for disability, death and medical insurance.

“It’s going to create a major impact,” Downing said. “We just don’t know how much yet. I’m sure there’s some actuary working on it right now.”

He said victims are likely to file claims for property or casualty first, which his company doesn’t handle.

“So far there hasn’t been an out of the ordinary number of claims,” Downing said. “But typically, (life, disability and medical claims) take longer.”

Williams, of the California Department of Insurance, said if insurance companies cannot pay all the claims filed from a disaster, they can share risk with a reinsurer, which essentially provides insurance to insurance companies.

“You have quite a bit of protection (from rates being raised),” Williams said.

Even reinsurers, a global industry with many companies based abroad, have their own reinsurers, called retrocessionaires. But ultimately, an insurance company can file for bankruptcy, he said.

“Typically, when a disaster happens, it takes about a year or more for companies to catch up,” Williams said.

It still remains unclear, he said, as to how rates here have been affected by the wildfires of 2003, which torched more than 300,000 acres in the county, destroying nearly 3,000 homes, burning down 22 businesses and killing 16 people.

“It’s not just disasters that impact rates,” he said.

The California Department of Insurance must approve insurance company rate proposals for most kinds of insurance.

Don Griffin, the vice president of personal lines at the Property Casualty Insurers Association of America, a trade group, said when trends show an increased number or degree of catastrophes, such as hurricanes, insurance companies purchase more reinsurance to cover claims.

In turn, they raise rates to cover their increased expenses, Griffin said, adding that California’s laws give consumers extra protection against the increases. He said not even half the states in the country have such laws requiring insurers to base rates on disaster history in that state alone.

Griffin said insurance companies that haven’t done enough business in a state with such a law can base their rate proposals on disaster histories nationwide.

“Reinsurance is not controlled by state insurance departments, though,” Griffin said. “If insurance companies experience a bad year and decide to buy more reinsurance, they figure it into their rate calculations.”

Even if the historic hurricane doesn’t cause California insurance rates to climb, said Ryan Singer, an analyst with the San Diego Regional Chamber of Commerce’s economic research bureau, it calls for homeowners in San Diego County to re-evaluate their own homeowners’ insurance policies.

Typically, flood insurance is not covered in homeowners insurance, Singer said. It can be purchased from the federal government.

“If they do live in a flood plain,” he said, “I’d encourage them to get a little better coverage.”

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