Still mopping up the mess from two hurricanes, some residents of the Gulf Coast now face the possibility of losing their homeowners insurance in coverage shifts that could jeopardize the rebuilding of a devastated region.
The chairman of Allstate Corp., the nation's second-largest auto and home insurer, said yesterday that the company plans to reduce coverage in the region, particularly in the coastal areas, because the risk of catastrophic losses is too great. The Northbrook, Ill.-based insurer reported this week a third-quarter loss of $1.55 billion, its largest as a publicly traded company, stemming from hurricane costs of $3.06 billion.
Allstate's pullback marks the beginning of what some say will be a transformation of the Gulf Coast's insurance market - one that could scar consumers and businesses for years to come. Besides fewer insurance companies competing for their business, people will likely face higher annual premiums and stricter building codes that could drive up home prices.
"It's a very serious situation if insurance companies start to drop people," said J. Robert Hunter, insurance director for the Consumer Federation of America and former Texas insurance commissioner. "No one is going to be writing new policies for a while, and you won't get a loan to rebuild if you don't have insurance."
Insurance officials in the affected states were disappointed in Allstate's reaction.
Louisiana Insurance Commissioner Robert Wooley said the state has consumer protections in place that prevent insurance companies from dumping policyholders in the aftermath of natural disasters like Hurricane Katrina. Allstate is the second-largest insurer in Louisiana and third-largest in Mississippi. The largest insurer in those areas is State Farm Insurance Cos.; it has not announced any retreat from the region.
Nevertheless, Wooley was not surprised by Allstate's announcement. It's pretty typical for insurers to scale back coverage after a catastrophe like Katrina, which is expected to cost insurers more than $34 billion, making it the costliest natural disaster in U.S. history.
Speaking to analysts in a conference call yesterday, Allstate Chief Executive Officer M. Edward Liddy did not provide details of how many policies would be dropped. But he promised changes to the company's underwriting guidelines, while pledging the company's continued assistance to thousands of affected customers in the Gulf Coast.
"It's not good stewardship of our shareholders' capital to have these kinds of losses in extreme events," Liddy said. "So we just need to get better, smarter and get smaller in some of these coastally exposed areas."
The situation reminds many of the aftermath of Hurricane Andrew, which until Katrina was the costliest hurricane in history. When it pounded south Florida in 1992, Andrew threw the state's insurance market into chaos. The $20 billion in insured losses drove 10 insurers into insolvency and the survivors were reluctant to stay.
As more insurers announced cutbacks, the state imposed a moratorium forbidding insurance companies from abandoning policyholders. Florida legislators also established a state-run insurance pool that acts as the insurer of last resort for homeowners. Nearly one million property owners became customers of the pool after Andrew.
The state also sponsored a fund to bail out insurers with heavy hurricane losses
While the reforms stabilized the insurance market, Florida homeowners continue to be battered by premium increases in the years since Andrew. And the four hurricanes that struck the state last year exposed more flaws in the system.
In the past year, numerous insurers have filed for double-digit rate increases and some have dropped policyholders.
Florida's experience gives residents in Louisiana, Mississippi and Alabama some idea of what's in store for them, analysts said.
"In the aftermath of a catastrophe with such dizzying losses, the natural reaction is to pull back from the exposure areas," said Craig Weber, a senior insurance analyst at New York-based consulting firm Celent. "But Allstate and its peer companies know they have to battle the perception that they only write business where they don't take losses."
Ameet Sachdev writes for the Chicago Tribune.