The Florida disaster could slow down a cost-cutting trend but isn’t expected to affect California rates.

Los Angeles Times

It’s something the industry would deny, but Hurricane Charley may well be a financial boon for insurers.

Damage estimates for the big Florida storm were running from $5 billion to $14 billion Monday, which would make it the costliest U.S. natural disaster since Hurricane Andrew in 1992 and the 1994 Northridge earthquake.

But stock prices rose for all 10 members of an index of property insurers. Experts said the industry might in fact benefit from the disaster, because it would allow companies to slow down a recent cost-cutting trend.

“Bad news is good news for the insurers as long as they have enough capital to stay in business,” said Kevin Callahan, who helps manage $1.1 billion at Boston’s Century Capital Management, which owns stock in Allstate Corp., Chubb Corp. and American International Group Inc. “And for the industry in general, capital levels are terrific right now.”

Industry officials offered a different explanation for the stock run-up, chalking it up to relief that storm damage wasn’t worse and belief that oil prices have peaked, tempering inflation. They also said the disaster probably would not affect insurance costs in California, as rates for each market are set independently based on regional liabilities. Many big insurers have created separate units for major states.

“The effect of the hurricane on State Farm rates in California will be zero, zip,” said Bill Sirola, a company spokesman. State Farm, the largest private insurer in both states, has a different company for each.

To be sure, smaller, regional insurance firms are likely to be harder hit by Charley than major national companies, at least when it comes to the bottom line.

Andrew, which caused damages of more than $20 billion in today’s dollars, rendered 11 insurers in Florida insolvent, leaving thousands of homeowners waiting years to be compensated for their losses.

Industry players, however, say that kind of fallout is unlikely to happen now, in part because Florida regulators have been diligent about ensuring that casualty companies of all sizes have sufficient capital to cover losses. In addition, computer models for predicting damages have improved dramatically.

“The big problem for the industry is the unexpected, like 9/11 or the mold claims that got out of control a few years back,” said Allstate spokesman Michael J. Trevino. “Modeling was absolutely done for a Category 4 storm on the west coast of Florida.” (A Category 4 classification is reserved for storms with sustained winds of 131 to 155 mph; Category 5 is the highest.)

Citing experiences in California and Texas, consumer groups predicted Florida policyholders would be unpleasantly surprised by how many items insurers have excluded from coverage in recent years, especially water damage and mold.

Trevino said his firm and the industry have tried to make clear any cutbacks in coverage. “I would hope that policyholders are aware of them,” he said.

Doug Heller, a senior advocate for the Foundation for Taxpayer & Consumer Rights in Santa Monica, said many victims of last year’s California firestorm also discovered that what they thought was full-replacement coverage was not enough to fully rebuild homes.

“What people are going to find, even if they have extended replacement costs, is that it’s not going to be enough. Because what’s in the fine print of an extended replacement cost policy is a limit,” Heller said.

Homeowners also may find it hard to renew policies at any cost or find new ones if they have water-damage claims, he added.

Trevino and executives at other big insurers said it was too early to estimate losses. A spokesman for Munich Re Group, a so-called reinsurer that spreads risk among insurance firms, estimated losses covered by insurance at $7 billion to $14 billion. However, Risk Management Solutions Inc., a Newark, Calif., specialist in catastrophe estimates, said they probably would not exceed $5 billion because the path of the hurricane had been narrower than expected.

Whatever the final figure, the insurance industry appears capable of absorbing the loss, although some companies may see their profits affected in the short term, Callahan of Century Capital said.

Reserves that the property-casualty industry calls statutory surplus — basically retained earnings, Callahan said — were $361 billion at the end of the first quarter, up $72 billion from a year earlier.

Experts said rates in Florida were ratcheted higher to allow a buildup of reserves after Hurricane Andrew.

“We realized then just how catastrophic an event like that could be,” said Bob Lotane, a spokesman for the Florida Office of Insurance Regulation.

Carriers set their rates high enough to provide reserves for big storm losses every 10 years, “and it’s been about 12 years with no major hurricane” until Charley, Lotane said.

In addition, insurers and the state worked out coverage adjustments that limited the exposure of private companies.

Among the changes: a shift from fixed deductibles to deductibles based on a percentage of loss; creation of Citizens Property Insurance Corp., a state-sponsored insurer of last resort that took over much windstorm coverage; and formation of the Florida Catastrophic Hurricane Fund, a backup pool that Lotane said has about $15 billion to help cover losses.

And banks also may see a boon from Hurricane Charley.

“The insurance money paid out to claimants will be deposited in the local banks in the billions of dollars,” said Richard X. Bove, a Hoefer & Arnett banking analyst based in Florida. “Loans will soar to rebuild the area. This storm could benefit these banks for years to come.”
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Costliest disasters

Preliminary damage estimates for Hurricane Charley range from $5 billion to $14 billion, which would make it one of the costliest natural disasters in U.S. history.

Cost*
Catastrophe — Region — Date (In billions)
Hurricane Andrew — South Florida — August 1992 — $19.9
Northridge earthquake — So. California — January 1994 — $15.2
Hurricane Hugo — N. & S. Carolina — Sept. 1989 — $6.1
Hurricane Georges — Florida Keys & Caribbean — Sept. 1998 — $3.3
Tornadoes — Midwest & South — May 2003 — $3.1
Tropical Storm Allison — Gulf Coast — July 2001 — $2.5
Hurricane Opal — Florida Panhandle — Oct. 1995 — $2.5
Tornadoes — Midwest & South — April 2001 — $2.2
Winter storm — Northeast — March 1993 — $2.2

*Insured property losses, in 2002 dollars

Sources: Insurance Services Office, Times research
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Associated Press was used in compiling this report.