Buying Business Insurance? Dig Deeper

Q: It has been four years since the events of Sept. 11 caused the world’s insurance market to restrict coverage and raise prices. Now, many are wondering if Hurricane Katrina will have the same effect on insurance. What do forecasters predict?

A: Insurers are still assessing Hurricane Katrina’s financial impact, gathering details on the magnitude of the damages caused by the storm.

While initial estimates are preliminary, insurers forecast that Katrina’s losses will fall somewhere in the range of $25 billion to $50 billion; some speculate losses greater than $60 billion. This makes Katrina the worst natural disaster in U.S. history.

Katrina’s losses easily surpass the $23 billion incurred when Hurricane Andrew struck South Florida in 1992, and they are in line with the original estimate of $50 billion forecast as a result of Sept. 11.

Just prior to Sept. 11, the insurance market was coming off a prolonged period of soft rates, fueled, in part, by a stock market that offered significant financial returns until its collapse in 1999.

By the start of the new millennium, insurers were taking back the premium concessions they freely gave to clients during the 1990s. Experts forecast a hardened market as insurers sought to consolidate their financial positions.

Because Sept. 11 drained the market’s resources, insurance rates increased, and some reinsurers collapsed. (Insurance companies use reinsurance to protect themselves against catastrophic losses by ceding a part of their risk to reinsurers.)

Insurers had little alternative but to adopt underwriting principles that ensured an immediate and direct financial return from policy premiums. Their solution was to restrict policy terms; exclude critical covers, such as terrorism; and increase premiums by a significant amount.

The market, however, does have a self-correcting effect. During the past four years, as rates increased, the market attracted new capital, which helped it to stabilize. Earlier this year, forecasters actually predicted a softening of some rates for 2006.

But Katrina effectively eliminated the prospect of lower rates, at least for property and marine covers. A number of reinsurers in those sectors have already called for rate increases during the upcoming renewal period. Other reinsurers, whose financial capacity is under scrutiny, have been placed on security watch lists, while some may possibly be downgraded.

The results ring familiar to insurance purchasers, who again face the prospect of paying higher premiums for property, marine, and energy cover.

But experts do not expect Katrina to have as dramatic an effect on the market as Sept. 11. The improved overall financial condition of today’s market means that a crisis of 2001’s magnitude is not likely to happen. The market, however, will continue to brace itself against another significant event, such as an earthquake or a terrorist attack.

Unfortunately, it often takes a significant disaster to appreciate an effective emergency plan’s importance. Before Sept. 11, cargo shipping association ICHCA published a general guide on preparing an emergency plan. After Sept. 11, guides focused on plans for the prevention and aftermath of a terrorist attack.

Today, emergency plans are likely to focus on natural disasters and their aftermath as well. We are all well-advised to consider the benefit of those plans before the next event takes place.

Looking for expert advice about business insurance and liability? I will try to help. Send your questions to Dan Negron: [email protected].

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