Hurricane outlooks are closely watched at such places as the Lloyd’s of London insurance market building.

Sarasota Herald-Tribune (Florida)

LONDON, UK — If you want to understand why homeowner insurance rates are so high in Florida, you have to look to London, specifically the financial heart of the city, the part that was London when it had mud streets.

Among modern buildings towering over ancient alleyways is Lloyd’s of London, the oldest continuously active insurance market in the world, a meeting place where insurance companies worldwide come to strike deals.

Lloyd’s began in a coffeehouse more than 300 years ago but now occupies a six-tower, high-tech modern building where actuaries and risk assessors help decide what people in the New World ultimately pay to insure their homes.

The reinsurance traders that come to Lloyd’s of London, along with a handful of other operations, insure the insurance companies that cover your home — companies such as State Farm, Nationwide and Allstate.

Insurance companies don’t have to pay for reinsurance. Most do because they don’t want to shoulder all the risk. Buying reinsurance helps insurance companies weather the massive payouts associated with hurricanes and other natural disasters.

But the companies are at the mercy of reinsurers such as Swiss Re and The Benfield Group, whose rates aren’t regulated the way most policy writers in the United States are.

Reinsurance rates have increased up to 300 percent over the past two years, making them one of the driving forces behind the massive increases Florida residents are paying to keep their homes insured.

“Florida has never seen anything like this,” said Jonathon Kees, spokesman for the Florida Office of Insurance Regulation.

Driven by record hurricane damages from the likes of Katrina and Wilma, and the fear that more big storms are likely to strike, insurance experts say reinsurance rates are likely to climb further.

Industry leaders say that past two hyperactive hurricane seasons make 2006 a pivotal year for the reinsurance industry .

“There is a sensitivity to what happens this year,” said Paul Nunn, head of risk modeling for Lloyd’s of London. “If you get a third active hurricane season where people’s profitability gets wiped out, you’ll find some insurance companies walking from certain classes of business, from certain geography.”

Betting smarter

Just like a homeowners policy, reinsurance policies typically have a deductible and state what type of damage is covered.

Insurance companies can buy a little coverage or a lot. When they want a policy, they seek out a broker and reinsurance companies assess the potential risk of the company’s properties and write a policy.

In the dark ages of reinsurance rate analysis — just a decade or so ago — the rates reinsurers charged were little more than educated guesses.

Negotiators might go to lunch, talk about how much insurance was in question, what the risks might be and come to a number.

These days the process is as high-tech modern as the Lloyd’s building.

“Ten years ago, people realized they needed some kind of scientific approach that would go from the ground up,” said Milan Simic, head of the ReMetrics Natural Hazards team at the The Benfield Group, the world’s third largest broker between insurers and reinsurers.

First came the catastrophe models in the mid-1980s. Called cat models in the insurance business, they gained popularity after big losses from Hurricane Andrew 1992 drove 11 insurers out of business.

Three major companies create cat models by running computer scenarios that show the likely cost of natural disasters.

Simic said Benfield sought to do better and went looking for its own experts to use science to actually predict how likely disasters are to occur.

For the world threatened by tropical cyclones — the generic name for hurricanes and typhoons — that’s the work of small group of climatologists and researchers, among them Mark Saunders and his team at Tropical Storm Risk.

Saunders, a University College of London climate researcher, founded TSR in 2000 and has been sponsored by Benfield and others since. Every year, he forecasts how active the upcoming storm season will be, and Benfield uses that information to help its clients decide how much coverage they need and how high to set rates.

Because of Saunders’ predictions for the 2005 hurricane season, Benfield counseled its clients that the risk of not having enough reinsurance was double what they had previously thought.

It was a good call.

Swiss Re — that’s Re as in reinsurance — estimates that the insured cost of natural and man-made catastrophes worldwide in 2005 was a record $83 billion, with hurricanes making up the lion’s share.

Hurricane Katrina alone cost insurers $45 billion, and Wilma and Rita came in at $10 billion each.

Saunders’ predictions helped drive reinsurance costs up, but may also have prevented the financial chaos left by Hurricane Andrew in 1992, when storm damage drove insurers out of business.

“How many insurance companies went bust after Charley or Katrina? The answer is none,” Simic said.

For Floridians dealing with bigger bills, the new rates may seem high.

Critics point out that despite having to pay out billions in claims from Florida and the Gulf Coast, the national insurance market in 2005 was the most profitable in a generation.

Doug Heller, executive director for the Foundation for Taxpayer and Consumer Rights, said the answer is even more strict government regulation over the rates insurance companies can charge.

California voters took that step in 1988 when they passed Proposition 103 barring insurance companies from passing on their reinsurance costs to policy holders.

But industry experts say prices are not artificially high. In fact, they say, the higher prices reflect more and more the actual risk associated with hurricanes.

Howard Kunreuther, an economist with the Wharton School at Pennsylvania State University and co-author of “Catastrophe Modeling: A New Approach to Managing Risk,” says the way to guarantee the insurance industry won’t abandon storm-ravaged states is to allow free market rule.

“Insurance rates have got to be based on risk,” he said.
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