If you have just gotten your insurance renewal you are probably suffering from sticker shock. Insurance rates are way up due primarily to Hurricane Katrina losses that are now in excess of $70,000,000,000 and still growing.

This has had a ripple effect for anyone purchasing catastrophe related coverage, be it flood, wind or earthquakes. This insurance market is heavily reliant on reinsurance to be able to offer its products. Reinsurance is the type of coverage that insurance companies purchase in order to limit their own losses in the event of an excessive set of losses. Reinsurance companies are set to cover about 2/3rds of the Katrina losses. These reinsurance companies now have substantially lower amounts of capital available for reinsuring catastrophe programs. Those that do have the capital available are charging substantially more this year.

Insurance companies are handling this change in the market place several different ways.

1. They have stopped writing the coverage and are terminating programs. Many carriers faced with either risking capital, an inability to obtain adequate rate increases, or a downgrading of their A.M. Best rating (shows financial strength) have opted to terminate their programs.
2. Increasing deductibles – The deductibles being offered are being drastically increased. Insurance companies evaluate their exposure based on what is called PML (Probable Maximum Loss). PML is the maximum amount of the building that the insurance company expects they will lose in an earthquake. If a building has a PML of 30% and the deductible is increased from 5% to 17.5%, they have shrunk their exposure in half.
3. Reduced amounts of insurance – Companies are reducing the amount of coverage they are offering in any one location. Should the property be at the epicenter of a quake, this will limit their exposure to a total loss at any one location.
4. Increased pricing – For the reduced limits and increased deductibles that they are going to offer you, they are increasing the premium they are charging to cover that exposure.

There is a second issue that is also causing premiums to increase. Due to the boom in construction, construction costs have gone up considerably in the past year. Now, in addition to increased costs per hundred dollars of coverage you now need to spend more money to fully insure your complex.

The good news is that normally a shrunken capacity is a temporary occurrence. If these insurance companies do not experience any new major catastrophes then they will begin to experience increases in capacity which will allow them to write more insurance, which normally drives down prices. A similar situation occurred after the Northridge Earthquake in ‘94. Prices went up about 7 fold in a 6 month period and then over the next 5 years dropped to a fifth of what they were in 1995. I anticipate a similar occurrence to happen now.