Magazine article Journal of Property Management

Insuring Disaster

Magazine article Journal of Property Management

Insuring Disaster

Article excerpt

While insurers cope with $44.5 billion in insured losses inflicted by some of history's most devastating storms, property managers brace for rate hikes and a sea of change in the way they guard against catastrophe by Michael Whiteley

As the Gulf Coast shook off the effects of two killer storms in September 2005, an estimated 15,000 insurance adjusters descended on the nine states deluged by hurricanes Katrina and Rita. The devastation they found may forever change the way they underwrite catastrophe.

Beyond the unprecedented failure of the New Orleans levee system, adjusters discovered a profound destruction of the regional infrastructure. The results stretched well beyond the physical damage and business-interruption costs most insurance policies cover.

Losses like decreasing manufacturing capabilities and skyrocketing commodity prices were not anticipated, yet still need to be recovered, said Gienn Pomerantz, national director of insurance claims services for BDO Seldman LLP in New York.

"A lot of the business interruption losses are coming from the general conditions in New Orleans as opposed to direct physical damage," Pomerantz said. "They may just not have anticipated those losses in the underwriting."

With Katrina and other catastrophe models pricing at $400 billion-a repeat of the 1906 San Francisco earthquake's estimated price tag-regulators said the insurance industry and existing state and federal disaster funds may be reaching their limits.

If insurance policies and disaster relief funds tap out, real estate managers and the commercial sector in general will have to shoulder the lion's share of the cost in the form of higher premiums, steeper deductibles and lower coverage.


In all, the damage from four hurricanes, a tropical storm and a pair of Midwestern tornado systems pushed insured claims for the third quarter of 2005 to an all-time high of $44.5 billion, according to ISO Property Claim Services, which tracks claims and losses for the nations property-andcasualty companies.

On top of the recent storms' devastation, insurers are still dealing with the impacts of 2004's stormy season. Four of the 10 most expensive hurricanes in U.S. history-with losses of $22.9 billionoccurred in 2004, according to a draft of the National Association of Insurance Commissioners' national catastrophe plan, approved for comment in 2005.

"All of this devastation has been handled to date either by the insurance industry or by states and the federal government in the case of the uninsured," according to the draft. "Insurers and their regulators wonder if the industry has the capacity to deal with the next major natural disaster."

With such a heavy burden on the insurance industry, property managers are concerned about hiked rates and decreased coverage. Managers and insurance industry leaders said rates for insurance covering commercial property are likely to increase between 20 and 30 percent beginning in early 2006.

Aside from a general rate increase, real estate managers and insurance providers also said they expect Katrina and Rita will price many commercial properties out of the traditional policies private insurers provide. More will be forced to apply to the high-risk pools created by the nations coastal states and funded by a combination of fees paid by insurers, policyholder premiums and state subsidies, instead.

"Clearly hurricanes have caused a general tightening in the overall commercial property market," said Peter Breitstone, president of Breitstone & Co. Ltd., an environmental risk and insurance management house in Cedarhurst, N.Y.


That general tightening has already spurred legislative action-a near necessity to relieve the burden on insurers and lessen the loss for real estate managers.

Pomerantz said the hurricanes of 2005 will change the regulatory landscape like no other storm since 1992, when Hurricane Andrew helped rewrite Florida's building codes. …

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