Catastrophe: How Will the Insurance Industry React?

May 9, 2011

The numbers are appalling on their own: the National Oceanic and Atmospheric Administration (NOAA) estimates that more than 300 individual tornadoes ripped through seven states from Mississippi to Virginia in late April, and that total includes a record 226 that touched down over the course of a single day. The tornado that hit Tuscaloosa, Alabama earned an EF-5 rating on the Enhanced Fujita Scale – in other words, it was the most powerful twister possible, and thousands of homes, cars and businesses were completely destroyed in that city alone. Most tragically, the overall death toll has surpassed 300, making this series of storms the third deadliest in American history.

Words can’t quite convey the enormity of this event. The NOAA and NASA both feature series of aerial photographs on their websites, and their pictures provide a simultaneously incredible and tragic view of the damage wreaked by these storms. The story has understandably dominated the insurance news media in the past few weeks, and it will almost certainly serve as the reference point for all such future disasters. There’s little doubt that these record-setting storms will directly affect the American P&C industry. The only question is how.

In the short term, the recovery of hardest-hit communities is the most important issue, and Americans have risen to the challenge by donating generous cash sums and hundreds of hours of volunteer work. Insurers have also begun resolving thousands of high-priority claims while state governments work to secure federal grants and help these areas rebuild. The communities will recover – but do the storms equal big changes for the insurance industry?

Despite insured losses projected to approach $2 billion in Alabama alone, there has been considerable debate within insurance circles over the past few weeks: will rates in general begin to rise as the market hardens in response to catastrophes like the Atlantic tornadoes and the Japanese tsunami? There’s less agreement on that point than you might think.

The general consensus holds that rates will go up in the wake of any large-scale natural disaster and that the ultimate winner will be the insurance business itself as most customers pay higher premiums for the same coverage. In keeping with this narrative, at least one of the nation’s largest carriers has indeed announced that home insurance premiums within certain states will rise by up to 25% in the coming months. But other industry veterans believe that, while we will see some temporary rate hikes in affected areas, the ultimate effect will be mild enough to go unnoticed by most customers. Many probably won’t see rate increases until 2014 anyway because of the significant time lags that come with processing such wide-scale losses and factoring them into the movements of the larger market. Certain sections of the industry will also benefit more than others: for example, some brokers predict a coming rise in renters’ insurance policies as more residents act to protect themselves from property damage and related expenses.

Speaking about the southeastern tornadoes and the Japanese tsunami, several voices within the business have stated that the storms will have little, if any, effect on market rates even if they intensify activity in the reinsurance sector. They do not believe that differences in policy from state to state can change the fact that rates will remain relatively static overall. Individuals taking this tack cite premiums that have been extremely low for several years in asserting that the still-weak American economy will not be able to support a dramatically harder market.

So how do you think the storms will affect the industry? Feel free to leave your thoughts below and stay tuned for further news and analysis.

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