Apartment owners in New Orleans face dramatic insurance price hikes on renewal, as insurance capital withdraws from the Gulf Coast wind exposure. While they can turn to the Louisiana Citizens Property Insurance Corp at higher prices, or self-insure, local business people see the higher costs as restricting development in New Orleans. Apartment premiums skyrocket -- New Orleans CityBusiness -- Deon Roberts, July 3, 2006.
The market for "cat bonds," debt securities that respond to catastrophes such as hurricanes and earthquakes, nearly doubled following Hurricanes Katrina, Rita and Wilma. The alternative risk transfer mechanism steps in when reinsurers withdraw from the market, a recurring market dynamic following a catastrophe. Katrina alone cost insurers $38 billion, of which reinsurers absorbed $20 billion, with some threatened with insolvency, according to Global insurers shift more risk to bond market | Reuters.com (June 23, 2006)
Bob Sargent wrote about these market forces shortly after Katrina, in: Specialty Insurance Blog: Katrina Chat (Sep 21, 2005).
In November 2005, Risk Prof provided some insights and useful links to theoretical models explaining insurance price increases resulting from Katrina, Rita and Wilma. Capacity constriction and costs of raising new capital suggested that existing insurers would pull back and build capital internally. At the same time, new capital is emerging in new reinsurers, some backed by hedge funds. Though insurance consumers and their elected representatives are likely to be unhappy, this looks like the capitalist system at work. RiskProf: Explaining Price Increases Post-Katrina (November 16, 2005).
For more on the Gulf States' "wind pools," see: Unintended Consequences: Impact of Katrina on Gulf states' wind pools (Sep. 17, 2005)
Posted by dougsimpson at July 4, 2006 07:40 PM