Hurricane Charley to rank as one of worst ever in U.S.

Storm: Damage could reach $10 billion, second to Andrew in 1992, but insurers were more prepared.

August 17, 2004|By Meredith Cohn and Stacey Hirsh | Meredith Cohn and Stacey Hirsh,SUN STAFF

Robert P. Hartwig, Hurricane Charley will go down in history as one of the nation's most damaging storms, costing an estimated $5 billion to $10 billion, but it won't have the wide-reaching impact on insurance providers and consumers that Hurricane Andrew did 12 years ago, experts said.

Devastation of this magnitude has not been seen since Andrew struck Florida and other Southern states in 1992 and cost $15.5 billion - or $20.3 billion in current dollars. That storm, the most costly U.S. hurricane, altered the method that insurers use to predict costs.

Industry members said they were more prepared in the wake of Charley because they raised rates, added deductibles and in some states, including Florida, sought a public pool of funds for such an emergency after Andrew.

"The immediate concern is the homeless," said Robert P. Hartwig, senior vice president and chief economist for the Insurance Information Institute, a trade group. "But obviously, we're talking about tens of thousands, if not hundreds of thousands, of claims over thousands of square miles. It will take weeks to fully adjust all claims. But the most needy will get something in their hands right away so they can get shelter and food."

That's not to say all property owners will be happy. Many small initial checks for living expenses will be written "when news reporters and cameras are all watching," said J. Robert Hunter, director of insurance for the Consumer Federation of American. Then, when final checks come, customers might not like the sum.

After the huge bills from Andrew, insurers threatened to leave Florida. Officials responded by creating the Citizens Property Insurance Corp., which became an insurer of last resort for high-risk homeowners. They also set up a Hurricane Catastrophe Fund to act as a reinsurer, or insurance for insurance companies, to share the costs from major storms. And while these actions kept the insurers in Florida, they had consequences, Hunter said.

Deductibles tacked on after Andrew could mean some property owners who suffered major damage from Charley could get nothing. They range from 2 percent to 5 percent of a building's value, meaning on a $200,000 home, the deductible could reach $10,000 - or the cost of a new roof, Hunter said.

Flood insurance also is not included in homeowner policies. Many Maryland victims of Tropical Storm Isabel are still disputing claims for water damage. They also will likely face higher premiums because of that storm, insurance experts say.

Improving situation

Despite the extreme weather, the situation is improving for the insurance industry, which has hit many policyholders with double-digit increases in the past few years, experts say. On top of normal rate increases for drivers, homeowners and doctors, among others, insurers raised premiums even more to make up for stock market losses.

Some rates continue to rise at slower paces, but Charley is not expected to have an impact outside Florida, insurers said.

"They're preparing for these types of losses so they should come out OK," said Michael Gannon, a spokesman for AIR Worldwide Corp., a Boston firm that helps insurance firms assess catastrophe risks.

MetLife has had several hundred home and car insurance claims in Florida, and about 60 adjusters are stationed throughout the area hit by the storm.

"This is really the business we're in, and we're prepared for this," MetLife spokesman Joe Madden said.

State Farm Insurance said it also is ready. "For an insurance company, for State Farm, this is the kind of thing we prepare for, and this is the kind of thing we stand ready to assist our customers with," said Kip Diggs, a spokesman at State Farm headquarters in Bloomington, Ill. "We sell insurance, and this is our opportunity to deliver on that promise."

State Farm has 2,900 full-time Florida employees. The company also sent hundreds of workers to Florida to help with claims, which as of yesterday, reached 35,047 from homeowners and 4,250 from car owners.

State Farm will pay for the first $200 million of those claims. The rest will be funded through the company's reinsurance agreements with other agencies, including Florida's Hurricane Catastrophe Fund.

Allstate Corp.

Allstate Corp., the country's largest publicly held personal insurer, will be reimbursed by the Hurricane Catastrophe Fund for Charley-related costs it incurs beyond $286 million. The company said it was too soon to estimate its total costs, but said the event is not likely to cause a financial impact beyond Florida.

Hartwig, of the insurance institute, said those who live in areas prone to those most damaging natural disasters - hurricanes, tornadoes, flooding and earthquakes-have to accept higher insurance bills.

"We can invest in new building codes, smart land use and zoning, but for the most part, coastal development continues with abandon, and that guarantees larger bills for insurers," he said. "It's a fact of life if you choose to live or operate a business in those areas. You permanently pay for more insurance."

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