Hurricanes put pressure on insurance premiums
Storms reversing years of slowly declining rates
Businesses that want more insurance protection in the wake of Hurricane Sandy may find premiums edging higher to reflect the uptick in the frequency and severity of Northeast storms.
Robert Hartwig, president of the Insurance Information Institute, the trade association for insurers, said, "The price of insurance, particularly in coastal areas of the Northeast, had been rising even prior to Sandy," after the industry paid out billions for Hurricane Irene and other big-ticket weather events in 2011.
Hartwig said property insurance premiums began rising in mid-2011, ending what had been a long period of stable or declining
rates. "The price of insurance for businesses actually fell from early 2004 through mid-2011, so many businesses, even today, are paying
less for insurance than they did years ago,"
Hartwig said. "Businesses are starting to see increases in the price of insurance after a seven-year decline."
What a particular business pays depends on dozens of factors, including the company's claims history, where it is located and the value of its assets. Hartwig said businesses have already begun seeing premium increases since mid-2011 of "anywhere from 5 percent to 10 percent to 15 percent, in some cases."
Paul Collins, managing partner for New Jersey for the insurance broker Willis, said, "There is no question that if you have property in traditionally catastrophe prone areas — on coastal property that is prone to flooding and windstorm — you are going to see some increase in the rates."
But outside of the catastrophe areas, Collins said he's seen flat or stable pricing.
"There is a sense that things had gotten to the point where prices were very, very low relative to the risks, and so the market has firmed a bit," he said. As insurance policies are renewed in the wake of Sandy, "we do not believe the impact on rates will be as extreme as you might think based on the severity of the storm."
Collins said business insurance premiums vary from "businesses that spend hundreds of dollars a year on a very small policy, to businesses that spend several million dollars a year, depending on the size and the complexity of the risks they cover."
He said the insurance industry is extremely well capitalized and will have no difficulty paying the Sandy claims, which by one estimate could be about $25 billion, or about half the storm's estimated $50 billion in total physical damage to homes, businesses and public property, and economic losses to businesses. According to an analysis by Willis, the insurance industry surplus this year reached a record $570 billion, up from $550 billion in 2011, which "should allow the industry to readily absorb the storm losses."
Small businesses in particular are facing significant uninsured Sandy losses, experts said. One New Jersey factory owner, who requested anonymity, said $1 million worth of machinery in his plant was submerged by flooding and severely damaged — but he has only a half million dollars in flood insurance, the maximum available under the National Flood Insurance Program.
Meg Errickson, director of claims for the Marsh & McLennan Agency, a unit of the Marsh insurance broker, said it's typical for small business to buy flood insurance through the National Flood Insurance Program. But unlike commercial flood insurance, she said, the National Flood Insurance Program does not provide business interruption coverage, which replaces lost profits while the business is shut down. "As far as business income or any extra expense to keep your business running, NFIP does not provide that," Errickson said.
Attorney Ryan Marrone, of Szaferman, Lakind, Blumstein & Blader, in Lawrenceville, said a lot of service businesses probably don't have business interruption insurance, because they didn't think they were at risk for the extended power outages from Sandy, which shut some companies for nearly two weeks. Marrone expects to be representing businesses making insurance claims: "The losses are going to be significant, so insurance companies are going to be very diligent about making sure they are defending their shareholders and their investments — and we need to be prepared on our side."
Duncan Ellis, U.S. property practice leader for Marsh, said given the level of disaster claims there is "a strong reluctance for insurance companies to reduce pricing. But flat renewals are still possible if you do not have heavy catastrophe exposure."
Hartwig said Sandy will likely rank as the third- or fourth-most expensive hurricane to hit the United States, "and by far the most expensive storm ever to hit the Northeast. But it is a manageable event, from an insurance perspective. Events like this are manageable because insurers must necessarily charge a premium that reflects the risk. And if we are in the midst of a longer-term trend, where events like this are more frequent and more severe, then insurance has to reflect that cost."
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