Will Hurricane Sandy Provoke Price-Gouging by Insurers?

Another year, another East Coast storm with loud warnings from the insurance industry, warning policyholders that huge rate hikes are just around the corner.  Or is it?

You may recall that 14 months ago around the time of Hurricane Irene, the industry starting pushing out to the news media the story that that the industry was in financial trouble and would have to start dramatically raising rates (trying to push the country into a new “hard” insurance market), even though the industry’s actual financial situation failed to support either of these notions.  The “hype” was plainly illustrated by an August 28, 2011, New York Times article entitled, “Irene Adds to a Bad Year for Insurance Industry.”  But lets just say, some of us called them on their bulls#*t, like this study from Americans for Insurance Reform, and critical news articles like this one in the Huffington Post.  . 

So what happened?  Well, the push-back worked and those 100 percent premium spikes never happened despite a concerted effort by some industry leaders (see plenty of examples here).  In fact, some have now completely changed their tune.  Just about a year ago, J. Patrick Gallagher, CEO of insurance broke Arthur J. Gallagher, was pushing for rate hikes and a new “hard market” out of concern “for the industry’s health.” Now, he’s saying this:

“Typically what you would get is a spiked recovery which is very traumatic to our clients. It’s not a good thing for clients at all,” he explained.

…“Now, I am not saying we are going to have a classic hard market. As I said, a classic hard market is the spiked recovery. You can go back to 1975, it spiked. You can look at 1984-85, it spiked. In 2000-2001, it spiked. And when that happens, it disrupts clients considerably,” Gallagher said.…

The current environment is better for clients, Gallagher assessed. “If you think about the fact that we’ve cut rates since 2003, that’s eight, nine years of rate cuts. Rates are back essentially to where they were in 1999. This is a better environment for clients than to let the balance sheets get to the point where they need a spiked recovery.”

It’s also certainly better for the carriers, he said. “I think they know that. And it’s literally a great environment for brokers. I would much rather have this environment, although everyone says ‘Oh, the hard market is so great.’ The fact is it completely disrupts our clients. They last for 24-to-36 months max. And everybody at the end of a hard market is angry with their broker and their carriers.”

Duh. By the way, this is more evidence that insurance industry insiders all admit to the existence of this self-made cycle even though they often publicly deny the cycle’s existence while their lobbyists try to take advantage of skyrocketing rates to push for so-called “tort reform.” But back to Hurricane Sandy and today’s insurance market.  Here are some of the good fortunes from which the industry has been benefiting so far this year:

• Insurance rates which, while not “spiking,” have been drifting up. (See, e.g., here, here.)

• Losses so far this year have been small.  The first half of this year "saw a drop in catastrophic losses, which totaled $13.8 billion, compared to $24.4 billion during the same period a year ago, according to the Insurance Information Institute."  Robert Hartwig, president of the Insurance Information Institute, says,“Catastrophe losses are down 40-50 percent through the third quarter [compared to last year] …Even with losses from Sandy, 2012 catastrophe losses will still be well below 2011.” (emphasis added.)  More from Reuters: "[I] 2012, most insurers' disaster losses are down substantially, leaving them with more capacity to absorb the billions of dollars in costs some expect from Hurricane Sandy."

•  Surplus and profits are through the roof. In Repeat Offenders, AIR noted that coming into 2011, “surplus - the extra cushion insurers hold in addition to the amount they have set aside to pay estimated future claims - rose by a factor of almost 40!” and was $580 billion in 2010 - an all-time safe financial position, far safer than required, and one might even say that today, the industry is overcapitalized. … Given these circumstances, the creation of a hard market [i.e. rate spikes] now would be purely for the purpose of price-gouging buyers.”  Sure enough, despite all its “record-breaking loses” in 2011, the industry “hit[] a record $565 billion [surplus] as of first quarter 2011 and falling off only slightly during 2011.” Not only that, in the first half of 2012, “The industry’s overall net income after taxes skyrocketed during this period to $16.4 billion, compared to $4.8 billion a year prior." 

• In industry will avoid paying a large chunk of Sandy’s losses.  As is true in all weather events, homeowners policies cover only wind and rain, not flooding.  So, as Reuters points out, “the brunt of the storm's financial impact may end up falling on the National Flood Insurance Program, which is responsible for almost all flood coverage in the country.” But not only that, many homeowners policies today’s have Hurricane deductibles.  Writes the National Underwriter website, PropertyCasualty360.com:

Interestingly, unlike Irene, it appears insurers will be able to enact hurricane deductibles since Sandy will make landfall as a hurricane. Irene was downgraded to a tropical storm just before it made landfall a year ago and officials in some states ordered insurers to waive the deductibles, which are typically 2 percent of a home’s insured value but can vary from state to state, or contract to contract, says Hartwig.

This could act to keep insured losses down somewhat, since hurricane deductibles are higher than flat-rate deductibles. For instance, a home with a value of $200,000 may have a flat deductible of $1,000, but a 2 percent hurricane deductible is $4,000.

Unlike the rest of us, the insurance industry has nothing to worry about.  Stay safe, everyone.

Comments

[Matt]

Sandy was technically declassified as a tropical system right before landfall
By the NHC...

Interesting to see how this plays out with hurricane deductables

[James]

It's so sad that one never really knows if they are covered until they need the coverage. When one buys Inaurance they are expecting not to pay anything period thats why we buy insurance. It has gotton to the point that we need to have a list of things that the insurance does not cover. Insurance companys give us the false hope that we are in good hands...when in reality their hands are only in our pockets.

[Angie]

I don't know what theirs states, but our deductible in Texas is wind/hail, not specified hurricane. When Ike blew through and wiped out an entire island and entire neighborhoods and small towns, our "hurricane" deductibles weren't waived. Guess we aren't "special". Don't think they were waived for Katrina either. As a matter of fact, I don't recall them ever waiving the deductibles, can you say election year?