The future cost of homeowner insurance hangs in the balance as the damage tally from Hurricane Katrina crystallizes, but industry experts remain optimistic that any widespread rate increases will be nominal.
Coastal Maryland is distant enough from the most hurricane-prone places to avoid significant leaps in homeowner coverage that might smack other coastal areas. But Maryland residents who own property in Florida or Louisiana, or other high-risk areas, should watch for those premiums to jump as much as 10 percent or 15 percent, some experts warn.
Thanks to the lessons taught by Hurricane Andrew, which devastated areas of south Florida and other southeastern communities in 1992, the insurance industry does not face a radical overhaul or major restructuring of premium rates. In the years immediately after Andrew, insurers reduced high-risk exposure, advocated housing code changes, reassessed reinsurance levels and adjusted rates, experts said.
"Over the next three to five years, rates might rise 1 to 2 percent across the board, directly linked to this," said Charles M. Nyce, director of curriculum for the American Institute for CPCU/Insurance Institute of America in Malvern, Pa. "The industry was better prepared for Katrina than they were for Andrew. Because of that, you won't see the fundamental changes in the industry or substantial increases in premiums."
After Andrew, some Florida homeowners saw rates skyrocket 30 percent to 35 percent, he said.
Part of any general increase would likely be the result of a trickle-down from higher prices for reinsurance - the insurance that insurance companies buy to protect themselves, Nyce said. But the biggest leaps in reinsurance costs would likely be for businesses, such as oil refineries in the gulf region, which suffered greatly from Katrina.
Dee L. Arnett, personal lines manager with Feinman Insurance Inc. in Rockville, agreed that consumers will not likely see much impact on homeowner rates.
"The companies have built up for the catastrophic events," she said. "They have reserves to cover this. While this is a catastrophic event, and it's going to affect a lot of people, it's not affecting everyone."
It remains to be seen just what impact Katrina will have on prices, Arnett said.
"From my conversations with Chubb, Fireman's Fund and The Hartford, they're not even talking about price increases yet," she said. "They're just concerned about helping those people and getting their lives back."
Alfred W. Redmer Jr., Maryland's insurance commissioner, cautioned that not only is it too early to understand the full impact of Katrina, but it also is too soon to write off the current hurricane season.
"I, too, am optimistic that we won't see anything too significant," Redmer said. "We're not anticipating any big ripples. But the season's not over. ... It's early."
And as scientists warn of global warming and a new weather cycle in which such storms are expected to be more virulent and more frequent for years to come, insurers realize that catastrophic losses are likely to increase.
One of the important developments resulting from the devastation of Hurricane Andrew was widespread use of computer models to help assess risk - a tool being further refined with each storm.
"The issue with hurricane risk is not that these storms are getting worse or that they're happening more often, it's that there are more structures there," said Michael Gannon, a spokesman for AIR Worldwide Corp., a catastrophe risk-modeling company in Boston. "They are worth more money. It costs more to rebuild them than 10 years ago."
He estimated that total property values along the United States East and Gulf coasts have doubled in 10 years.
Still, the four hurricanes that struck Florida last year did not spark widespread premium increases, and just one insurance company became insolvent afterward compared with 12 after Hurricane Andrew, said Joseph Annotti, a spokesman for the Property Casualty Insurers Association of America.
"You didn't see an increase across the country," he said. "You did in Florida. ... Insurers will look at their exposure in the Gulf states, their losses, and they'll have to make decisions on how many they can insure in that area, and what they charge."
Florida also set up a catastrophe fund to handle reinsurance after Andrew. The premiums are collected by insurance companies, and the government holds the money tax-free, so it accrues faster than if it were held by private companies. It is possible that a similar fund could be developed in the areas hit by Katrina, Annotti said.
Robert P. Hartwig, chief economist for the Insurance Information Institute in New York, said the only way he could envision premium rates rising significantly for homeowners across the country would be if trial lawyers won rulings from judges that held private insurers responsible for flood damage from Katrina - something generally excluded from homeowner coverage. Typically, homeowner policies address damage from wind and wind-driven rain but not flooding.
On Thursday, Mississippi sued Allstate Corp., State Farm Mutual Automobile Insurance Co. and three other insurers for refusing to cover flood damage from the storm.