Recent disasters likely to boost insurance rates

October 25, 1992|By New York Times News Service

The cost of insurance for homes and automobiles is expecte to rise 10 percent or more in some states, and perhaps become harder to obtain, as a result of the staggeringly high losses to insurers from Hurricane Andrew and other recent disasters.

The losses this year, estimated at more than $10 billion, come after a number of difficult years for the property-casualty industry.

And they come while lower interest rates are reducing the return on insurance companies' investments. Consequently many companies will experience cash shortages in the next 12 months and will be under pressure to raise rates, analysts and industry executives say.

Nonetheless, consumer advocates say many insurance companies are far healthier than they would have the public believe and are trying to use the catastrophes as an excuse to gouge the public.

The conflict was stoked when an internal memo from the American International Group (AIG), a major property-casualty insurer, was published in the Washington Post.

In it, J. W. Greenberg, executive vice president, wrote that Hurricane Andrew was "an opportunity to get price increases now." Maurice R. Greenberg, AIG's chairman and J. W. Greenberg's father, said the memo's meaning had been taken out of context.

Last month, the insurance commissioners of Florida and

Louisiana took the unusual step of freezing AIG's premiums.

Some companies say moderate price increases on personal lines of insurance may take place in coastal states from Texas to Florida and up the East Coast, possibly as far north as New Jersey. Prices may also be affected in California, where insurers pay for catastrophe reinsurance for earthquakes.

But a strong reaction by the public and regulators is expected to contain the increases. No one is certain how much rates might go up in each state; industry analysts say perhaps 5 percent to 15 percent.

"Hurricane Andrew was a fundamental shock to the system," said an executive of one big insurance company who insisted on anonymity. "Either prices are going to have to go up somewhat in disaster-prone states, or companies are going to have to back out of the business."

After an original estimate of $7.3 billion of losses in Florida, industry experts last week revised their estimates to $10.2 billion in Florida plus another $500 million in Louisiana. Those losses are more than twice the $4.2 billion insurers lost in what had been the nation's most expensive storm, Hurricane Hugo in 1989.

While insurers were still catching their breath after Andrew, Hurricane Iniki hit Hawaii and cost an additional $1.6 billion, making it the nation's third-costliest storm. And all of that followed losses from the Los Angeles riots and a flood in downtown Chicago.

Altogether, the industry is expected to pay at least $16 billion in claims on disasters this year, according to the American Insurance Services Group, which estimates industrywide damages from disasters. Most insurers will be able to recoup about one-third of those losses after taxes.

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