RiskProf notes that Katrina will have impacts on insurance prices, though they will be more subtle than the recent sudden spikes in gasoline prices seen across the country. Katrina will take a significant amount of capital out of the whole insurance system. Most of it will initially come from reinsurers, but reinsurers always operate on a long-term relationship with the companies they reinsure. They pay you this year, and recoup the losses next year, and the year after, and the year after that.
Property loss reserves in the whole system will be immediately increased, immediately wiping out taxable income for the quarter (and the year for insurers concentrated in Gulf windstorm exposures). This is a big hit, but it is one that is in the range of forseeable 100 - 250 year windstorm losses. Insurers and reinsurers know that the "reversion to the mean" allows the survivors to earn back their losses in future years.
Katrina will "thin the herd" of insurers that were insufficiently capitalized or reinsured, and those who took a risk on under-insurance. Those who passed on flood insurance will suffer. Those owning property in the heavily impacted area will have to think long and hard whether or not they want to reinvest what insurance proceeds they get in the below-sea-level bowl that man created by "flood management" in the New Orleans metro area. Vindicated will be those engineers and other experts who long warned that New Orleans could not survive a storm like this. See Business Week Special Report Let Katrina Be a Warning (September 1, 2005) and Budget cuts delayed New Orleans flood control work - Yahoo! News
Reinsurers will increase their rates, some marginal insurers may fail and their capacity exit the market, some insurers that were "on the fence" about windstorm exposures on the beach will retire from the market. Residential flood losses will be absorbed into the federal tax and deficit base through the flood insurance program, but commercial property writers may be hit on flood losses to apartments, offices and industrial property. Many windstorm losses will be spread through "wind pools" and government subsidized pools whose solvency will be tested and financing re-evaluated. Commercial writers that got aggressive in the energy markets may find themselves paying disproportionate losses. All these market forces combine and point to an inevitable hardening of the market in property insurance, particularly in the Gulf and Florida.
The effects on insurance prices are subtle and complex. Count on politicians to make them seem simple and controllable with hasty legislation that will have unintended consequences.
The greater effects will be on those losses not covered by any insurance, such as the immense human suffering of those trapped in the chaos of New Orleans.
See: RiskProf : Katrina and Florida Insurance Prices
Posted by dougsimpson at September 1, 2005 07:23 PM