Pricing Picture Uncertain After Jeanne Hammers Florida

Unprecedented fourth hurricane in single season could send homeowners rates soaring

While no new storm was on the horizon as this edition went to press, it's important to keep in mind that there are still nearly two months left in the 2004 hurricane season. Thus, no one in the industry is ready to make a definitive statement about the impact of this shocking series of events before the season's end on Nov. 30, when all the claims are tallied and insurers can rest assured that no further hurricanes are forthcoming.

Still, it appears clear that the state's beleaguered property owners could face another rude awakening in the coming months when they see their next homeowners' insurance bill. However, the severity of the rate shock depends on so many economic and political factors that insurers are hesitating about making any predictions.

Hurricane Jeanne made landfall as a Category 3 storm late Saturday, Sept. 25, in the same Southeast Florida area where Hurricane Frances struck on Sept. 3. "While a more intense hurricane, Jeanne was not as large or as slow moving as Frances, and will likely result in similar insured losses," said risk modeler AIR Worldwide representative Mike Gannon.

Preliminary damage totals for Jeanne have been estimated by catastrophe modelers up to $10 billion. This comes on top of the $6.8 billion in damages caused by Hurricane Charley, the $4.4 billion hit from Hurricane Frances, and the estimated $3-to-6 billion loss from Hurricane Ivan.

Jeanne's losses, even at the lower end of the estimates, would most likely put the four-storm total over $20 billion. Hurricane Andrew caused insured losses of $20.3 billion in inflation-adjusted dollars by itself in 1992the industry's worst loss.

Following Hurricane Andrew, a whole new system of homeowners insurance pricing was implemented to keep private carriers in the market, including percentage rather than dollar deductibles a source of some contention as one storm piled on top of another.

Lehman Brothers analyst Christopher Winans expects carriers to seek rate increases of up to 25 percent in the coming months. "The bottom line is insurance companies lost a ton of money and they are going to want to recover that one way or the other," he said.

However, one industry representative Sam Miller, executive vice president of the Florida Insurance Council in Tallahassee said it was way too early to tell what kind of rate increases carriers may seek and, more importantly, what they will be granted. "Nobody has a clue what is going to happen now, and [rate hike estimates are] just pure speculation," he said.

Mr. Miller added that the likelihood that rates primary companies pay into the Florida Hurricane Catastrophe Fund will not go up this year is another good sign on the pricing front for consumers. The fund which is expected to cover several billion dollars of this season's losses was created in November 1993 during a special legislative session after Hurricane Andrew. The fund's purpose, according to its Web site (www.sbafla.com/fhcf) is "to protect and advance the state's interest in maintaining insurance capacity in Florida by providing reimbursements to insurers for a portion of their catastrophic hurricane losses."

Another future pricing factor is that the industry has reaped the benefits of 12 years of rates that spiked in some instances up to 300 percent in the most disaster-prone areas, in addition to being relieved of the duty to provide coverage to those areas.

"I am sure some companies are going to go back and look at their models and see if their experience this year means the projected losses they are likely to face over the next 20 years are now low," Mr. Miller said. "If they come to that conclusion, they have to demonstrate that to the Office of Insurance Regulation."

In addition, Florida's top insurance regulator, Chief Financial Officer Tom Gallagher, has made it clear that any rate increases in the double-digit range will not be a cakewalk for the industry.

The end of the hurricane season will most likely find newly elected state lawmakers back in a special session, in which the states percentage deductible system could come under fire. With areas such as the southeast coast and Orlando having borne the brunt of two or three events, property owners are facing higher deductibles in double and sometimes triplicate claims.

Any such codified deductible relief will only apply to future storms. There was talk that current policy owners could see help in that area from the federal government, whose head President George W. Bush faces re-election next month, with Florida being a critical swing state.

However any tinkering with the deductible mechanism, noted Hartford-based insurance attorney Alan Levin, will make the entire rate structure fair game. In addition, the multiplicity of events could be a complicating factor in settling business interruption claims, he noted.

While a dozen companies went under and 22 others were put under state management as a result of losses from Hurricane Andrew, so far only one company is close to reaching such a state from 2004 storm losses. (The Florida insurance department will not release the name of the troubled insurer for the time being.)

How the storms play out in the reinsurance market will be another critical factor in determining how much the major primary carriers will have to charge to compensate for their losses.

So far, the only individual company to estimate losses for all four events has been Bermuda-based Renaissance Re, which put the figure at $425 million. In doing so, company officials noted it is a proportionally more significant player in the Florida market.

However, despite the fact that the figure was about $50 million more than he expected, Prudential analyst Jay Gelb maintained his recent upgrade of the company since he expects the storms to stabilize the property reinsurance market. "RNR should benefit because it is the worlds largest writer of property-catastrophe reinsurance," he wrote to investors last week.

Reproduced from National Underwriter Edition, October 1, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.