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Hurricanes upend the world as we know it. Boats wind up marooned on city streets or on top of buildings. Cars dangle from trees. Homes, those symbols of security and permanence, disappear completely.
The world of insurance can be just as topsy-turvy after a disaster. Consider:
- Insurers suffered record losses after Hurricane Katrina and her siblings swept the Gulf states last year -- but they also turned in record profits.
- Insurance companies are in the business of managing risk, yet they failed to predict the frequency and severity of recent storms. As a result, insurers are boosting their rates by 20% to 40% in some states or refusing to cover high-risk areas altogether.
- Policyholders in coastal states from Texas to Maine are facing sharply higher premiums and higher deductibles, and many are having difficulty finding coverage. But homeowners' premiums and coverage might actually improve in other states.
That's because insurers who are reducing their coverage in some areas may go after more business in states that are perceived as safer, sparking more competition. The Midwest, despite its vulnerability to tornadoes and hail, may prove the biggest beneficiary.
The retreating insurers "have to deploy their capital somewhere," said Tony Diodato, A.M. Best's vice president for property/casualty insurance. "Tornadoes and hail do a lot of damage, but the magnitude of damage from a tornado or series of tornadoes is a lot less than a (Category) 3 hurricane going through a populated area."
Even if rates don't actually fall in the heartland, increased competition could dampen premium increases there and in the West in the coming year, agreed Robert Hartwig, chief economist for the Insurance Information Institute, a trade group. Premiums may rise to reflect higher building costs nationwide -- a trend that was in place long before the hurricanes exacerbated the problem in the South -- but that's all, he said.
"People in the Midwest, Rocky Mountains or the West," Hartwig said, "won't see any type of effect on their homeowners' premiums from the (hurricanes)."
That said, the number of states that are feeling the fallout from Katrina and the other storms is surprisingly large:
- Rates are up significantly in coastal areas of New England and New York, as well as in hard-hit Florida, Louisiana, Mississippi and Texas. A survey by the Risk and Insurance Management Society found premiums rising as much as 33%.
- Insurers are bailing out of once-desirable markets including Cape Cod, Mass., and Long Island, N.Y.
- In Massachusetts, the state-run high-risk insurance pool -- normally considered an insurer of last resort -- now writes more wind-damage coverage than any single private company, Hartwig said.
The situation may seem bizarre to homeowners who associate hurricanes with the South, but that's only because memories are short. Connecticut, Maine, Massachusetts, New York and Rhode Island suffered hundreds of deaths and severe property damage during several Category 3 hurricanes that swept through upper Atlantic states between 1938 and 1960.
Insurers are suddenly paying attention to history for a variety of reasons:
The sheer size of their recent losses. The exact amount depends on whom you ask; the National Association of Insurance Commissioners says the 2005 toll was $58.8 billion, while the insurance institute says insurers lost $57.7 billion. Either way, it's a record, and one of the main reasons most insurers survived relatively unscathed is that their investment returns for the year were quite strong. Insurers don't want to count on their investments bailing them out every year.
Predictions of worse to come. Many scientists, including those at the National Oceanic and Atmospheric Administration (NOAA) Hurricane Research Division, have been warning for years that hurricane seasons may get worse, with more frequent and severe Atlantic storms in the next 10 to 30 years.
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