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The Consequences of Hurricane Sandy for the Insurance Industry and Policyholders….

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Insurance

Insurance (Photo credit: Christopher S. Penn)

Hurricane Sandy on the East coast of the U.S. is said to be the largest storm to hit the U.S. in its history. Early estimates of the direct damage caused by Hurricane Irene were in the range of USD 7 billion but ultimately it inflicted USD 15 to 20 billion in damage. There are various estimations of just how much this event is likely to cost.Nevertheless it would seem that Hurricane Sandy will create greater destruction of property and possibly life. Added to that is the loss of several days of commercial activity, spread over a week across 25 percent of the U.S. economy. One source suggests an initial estimate of the economic losses imposed by Sandy is about USD 35 to 45 billion. (See http://www.cnbc.com/id/49596150).Other commentators such as Greenberg  suggest that the figure is likely to be in the USD 3 to USD 6 billion range possibly reaching USD 20 billion.

Of course these are simply predictions and often the damage comes from an unsuspected quarter, as it did in Japan in March of 2011 (the nuclear power station).  Janney Greenberg believes that the economic costs of Sandy will “far exceed the insured losses”. Despite that, the deductibles have been increased across the board and  policy terms tightened. It is thought that a meaningful portion of the losses are likely to be self-insured. (See http://blogs.wsj.com/marketbeat/2012/10/29/the-cold-math-of-hurricane-sandy/).

Insurers, retailers, energy companies and airlines are just four sectors directly in the storm’s eye. The insurance marketing blurb suggests that the ensuing event will pose no particular difficulty for insurers. Due to the years of especially destructive storms such as Hurricanes Katrina and Irene insurers have learnt important lessons — namely, to charge higher homeowner rates and apply stricter underwriting standards. As a result the message is that insurance companies are  better prepared than ever to weather the storm. It is predicted that many companies will take losses but those with the strongest balance sheet will fare reasonably well. It is unlikely that insurance companies’ bottom lines will be too badly affected as they offload their risk to reinsurers.

Insurance stocks tend to trade lower after any sort of natural disaster. The first cut the deepest and then they rebound. After major catastrophes insurance companies hike their premiums, so immediately there is more money flowing into the company. In addition insured catastrophe losses are  said to be much lower than 2011, in fact 50 per cent down from last year. In 2011 U.S. insurers saw approximately USD 32 billion in losses, according to Insurance Information Institute president and economist Robert Hartwig. Nevertheless as a result of the looming storm the European equity markets were dragged lower by a slump in insurance stocks on Monday as investors braced for the arrival of Hurricane Sandy. Markets ahead of the arrival of Hurricane Sandy contributed to a quiet day.

There is an accelerating trend for extreme weather observed over recent years which has the potential to undermine some insurers’ ability to manage in the future and, in some cases, even survive future catastrophic weather-related loss events. Around the world these extreme weather events are causing more businesses and properties to be uninsurable in the private insurance markets. In turn this leaves higher risks and costs for governments, taxpayers and citizens.

In the U.S., According to Ceres, “since 1990, total government exposure to losses in hurricane-exposed states has risen more than 15-fold to USD 885 billion in 2011.” (See http://www.ceres.org/press/press-clips/5-insurance-stocks-in-hurricane-sandys-crosshairs).

So what of the consequences of this storm for U.S. citizens?  There is no doubt that if it becomes as devastating as predicted it will be a life changing event for many thousands or people. If insurers past performance is anything to go by – the population of the East Coast is likely to be faced with the same problems earlier affected populations have experienced in times of natural disaster in the U.S.

After the Florida storms of 2004 and 2005 a state-sponsored mediation program had to be arranged to assist with the massive number of claims and the ever rising backlog that emerged as a result of deliberate slow settlement by insurance companies. There were more than 25,000 mediations. In the wake of Hurricane Katrina which was the worst natural disaster in U.S. history there were 20,000 complaints a month to the Insurance Commissioner. Lawsuits against insurers numbered in their thousands and included class actions on behalf of tens of thousands of policyholders; an antitrust action and another class action by the Mississippi attorney general to name but a few.[1] Hurricane Katrina demonstrated an absolute failure for the insurance system from the point of view of policyholders.

As proposed in one of the chapters of my book, these events need not be happening this way – there are other solutions to ensure the protection of citizens’ property. I think it would be naive to imagine that we will not see a repeat of these earlier insurance company performances. Though one can but hope!

~Future Proofing for a sustainable, participatory, democratic society.

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[1] Delay, Deny, Defend: Why Insurance Companies Don’t Pay Claims and what you can do about it, Jay M. Feinman, 2010, Penguin Books, London, UK.

Author: Sarah Miles

Trained as a lawyer, psychotherapist and mediator. My goal is to make my voice heard for the causes in which I believe so as to improve and contribute to a more sustainable and equitable society. I believe in the enormous power of the human spirit and the power within each of us to effect major change. "The only triumph over evil is for good men [and women] to do nothing". https://thechristchurchfiasco.wordpress.com/

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