East Coast Hurricane Could Cost Insurers $100B, Says I.I.I.

If a Category 5 hurricane with winds exceeding 155 mph, such as Hurricane Katrina, hits Florida or parts of the East Coast, it could inflict insured losses of over $100 billion, an insurance expert warned today.

Robert Hartwig, president and chief economist of the Insurance Information Institute sounded that alarm at the 2007 National Hurricane Conference meeting in New Orleans, according to a statement from his organization.

I.I.I. said insurers paid more than $40 billion to 1.7 million U.S. policyholders in six states after Katrina struck in August 2005.

"Rapid coastal development and rising property values are the primary reasons for the upward trend in insured catastrophe losses in this country," Mr. Hartwig told the conference.

"And government subsidies to those who reside along the coastline only exacerbate the problem," he noted.

Mr. Hartwig said these trends, coupled with a consensus in the meteorological community that the United States will see more frequent and more severe hurricanes over the next 10 to 15 years, have driven up the cost of property insurance in coastal states, even while the homeowners insurance market remains relatively stable elsewhere.

According to I.I.I.'s forecast, the average U.S. homeowner will only see a 2 percent to 4 percent premium rate increase in 2007.

Mr. Hartwig noted that four of the five states with the highest insured coastal exposure are situated on the East Coast, with Florida ranked first at $1.93 trillion, followed closely by New York with $1.91 trillion.

Massachusetts, which was said to have a $662 billion exposure, and New Jersey at $506 billion ranked fourth and fifth.

Away from the East Coast, Texas ranked third, with total insured coastal properties valued at $740 billion. The figures he cited were calculated by AIR Worldwide.

"Florida's state-subsidized Citizen's Property Insurance Corporation is now the largest home insurer in that state," Mr. Hartwig noted.

The expansion of Citizens, he said, will have significant repercussions for all of Florida's homeowners insurance policyholders and taxpayers after the next hurricane hits.

If Citizen's does not have the financial resources to pay its claims after a severe storm, a likely scenario, state lawmakers would likely have to increase assessments for all homeowners insurance policyholders in Florida, raise taxes, or do both, according to the I.I.I. president.

He said the insurers of last resort in both Louisiana and Mississippi had financial obligations well in excess of their revenue stream in 2005, the year Katrina hit, as they ran deficits totaling hundreds of millions of dollars.

"Ninety-five percent of the 1.2 million homeowners insurance claims filed in Louisiana and Mississippi after Katrina have been settled, with just 2 percent in dispute," he added.

Mr. Hartwig commented that, "The Gulf Coast courtroom dramas are the exception, not the rule. And insurance companies operating on the Gulf Coast did not receive a penny to recover flood-related losses."

"Ultimately, insurance prices must reflect true risk. And while insurers remain deeply committed to helping policyholders reduce vulnerability by supporting stronger building costs and mitigation, insurers have no control over local land use decisions," he said.

His complete presentation is available online at http://www.iii.org/media/presentations/nhc2007/.