The record total of homeowners insurance claims payments resulting from the 2005 hurricanes in Louisiana is enough to wipe out all homeowners premiums paid in the state during the past 25 years, as well as every dollar of homeowners insurance profits ever earned there, according the Insurance Information Institute (I.I.I.).
The magnitude of the loss will force a fundamental reassessment of risk in the state by insurance companies, the I.I.I. said in a news release. This reassessment could lead to making homeowners insurance more costly and less available in Louisiana.
Homeowners insurers in Louisiana are expected to pay $12.4 billion in claims from Hurricanes Katrina and Rita, an amount equal to all homeowners insurance premiums paid in the state since 1981 and nearly 13 times the estimated $969 million in homeowners premiums paid last year.
Homeowners insurers in Louisiana have earned only $17.3 million in profits, including investment income, since 1985. The record losses of 2005 erased this modest sum as well as all previous profits earned.
Insurers will pay an estimated $10.9 billion on 695,000 claims to homeowners in Louisiana from Hurricane Katrina and $1.5 billion on 130,000 homeowners claims from Hurricane Rita, according to ISO.
Overall insured catastrophe losses in 2005 exceeded $55 billion, a new record. The majority of those losses occurred in Louisiana and Mississippi. Hurricanes Katrina, Rita, Wilma and Dennis resulted in a total of approximately three million claims.
“After mega-catastrophes such as Hurricane Katrina, insurers and reinsurers will reassess the risk associated with writing homeowners insurance in Louisiana,” said Dr. Robert Hartwig, chief economist of the I.I.I. “This reassessment will be a multi-year process.”
“Clearly risk is heightened and premiums must rise to more accurately reflect that risk,” said Hartwig. “Some insurers may also limit the number of homes they are willing to insure in coastal areas until the reassessment process is complete. This would increase the number of home owners who will need to seek coverage through Louisiana Citizens Property Insurance Corporation, the state’s insurer of last resort.”
Hartwig explained that insurance rates in Louisiana are based on individual insurer experience in the state. “Profits from other types of insurance in other states—auto insurance in Illinois for example—cannot be used to subsidize hurricane-related losses in Louisiana,” he said.
Hartwig pointed out several factors that home insurers will be considering in their reassessment of risk in Louisiana. They include:
–Predictions by meteorologists that hurricanes will continue to be more frequent and more intense for the next 15 to 20 years.
–Uncertainty surrounding where homeowners will be allowed to be rebuild and to what standard. Enforcement of the new statewide building code will be an issue. It is also unclear what degree of protection newly rebuilt levees will afford New Orleans.
–Lawsuits that seek payments for flood damage under homeowners policies which contain long-standing and explicit exclusions for such losses also present a problem. Insurers are concerned that they could be held liable for billions of dollars in losses for which they have collected no premiums and have no reserves.
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