Q&A; : Hurricanes and Your Insurance
Hurricanes Andrew and Iniki are likely to leave a financial legacy far more enduring than the damage they caused or the rebuilding that has followed.
Premiums for home, auto and commercial coverage could be affected for 30 years or more, insurance experts say, although the effect will be concentrated in the three states that were hardest hit. Experts also say the hurricanes could cause a wave of insurance company failures and could affect the availability of insurance in certain areas as well.
Here are some questions and answers for consumers.
Will insurance rates go up as a result of the hurricanes?
Yes, but not here. Rates in Florida, Louisiana and Hawaii are likely to rise between 2% and 10% annually, depending on the carrier, said Sean Mooney, economist at the Insurance Information Institute in New York. Consumers in other states should not expect rate increases, although California rates may be affected by the Los Angeles riots.
What if you live elsewhere and your carrier hikes rates blaming the hurricane?
Talk to the insurance regulators in your state, said Robert Hunter, president of the National Insurance Consumers Organization in Herndon, Va. Hurricane-based rate hikes are not legitimate in states that have not been affected, Hunter added. That goes to the heart of how insurance rates are calculated.
How are rates figured?
Insurance actuaries study historical loss data and try to figure out how likely it is that they will suffer similar losses in the future. As a result, common occurrences, such as kitchen fires and thefts, account for the bulk of a homeowner’s premium. However, a portion of each premium dollar goes to handle catastrophic losses, such as those suffered by hurricane victims. Depending on where you live, the catastrophic element of your policy may account for between 5% and 25% of the total cost.
When there is a massive disaster such as the recent hurricanes, insurers refigure the catastrophe portion of your premium by adding the cost of the new disaster to previous disasters. These costs are then divided by a number that’s supposed to be equivalent to the annual likelihood of a similar event striking again. In other words, if hurricanes like Andrew are a once-in-30-year occurrence, the insurer should divide the cost over 30 years.
Does that mean rates in the affected states will stay high for 30 years or more?
Maybe. But remember that the catastrophic coverage is only a small portion of the total premium. If other costs of coverage decline, the total premium should decline as well. For instance, because a number of cars were lost or damaged during the hurricane, auto rates could rise. But there have been fewer auto insurance claims this year because people are driving less because of the recession, Hunter said. That makes it less likely that auto rates will jump significantly.
What other impact might the hurricanes have?
Huge loss claims could push a number of smaller, thinly capitalized insurers out of business. Florida regulators have said they’re concerned about the continuing viability of four or five companies. Hawaiian insurers could be hard-hit as well, but it’s too soon to say how many or which ones.
How do insurance failures affect consumers?
If you’re unlucky enough to have insurance with a failed company, it’s likely to take longer to get your claims paid. Normally, hurricane claims should be paid off in three to six months. With a failed insurer, it could take twice that.
Policyholders of failed domestic insurers are usually covered by state-operated guaranty associations that will pay their claims up to certain limits. But these guaranty associations don’t have money sitting in the bank. They have to collect it from other insurers operating in the state. And that takes time. In addition, some states have limits on how much money can be collected each year. If you hit up against those limits, it could take years to get paid.
Consumer rates are affected by insurance failures because companies pass on the cost of guaranty-fund coverage to consumers in the form of higher rates.
Will the hurricanes affect availability of insurance coverage?
Yes. Some carriers are likely to stop writing certain policies in coastal areas that were hit most severely by these disasters, and other companies will fail. But insurance experts expect that state-operated insurance programs will pick up the slack. Most states have mandatory programs to provide insurance to consumers in high-risk areas. Typically, these programs grant coverage at set rates for those who can’t find insurance in the private market.
