Natural catastrophe insurance isn't easy to come by-especially at reasonable prices-following the recent history of big storms in coastal regions by Allan Richter
This year's hurricane season may be relatively mild compared with the 2005 season that brought Hurricane Katrina's devastation to the Gulf Coast, but properties in coastal communities around the United States are still enduring a big financial squeeze when it comes to acquiring adequate insurance coverage.
Property insurance to protect against storm damage is either impossible to come by or has skyrocketed beyond affordable. From July 2005 to July 2006, the supply of hurricane risk insurance fell by 70 percent, said Aaron Davis, director of the national terrorism and property resources group at Aon Corp., a Chicago-based commercial insurance brokerage and consulting firm.
During that same time period, he said insurance rates climbed as much as 250 percent for accounts with heavy catastrophe exposure and losses. Companies that haven't suffered losses or haven't filed claims, however, have also seen insurance premiums double, Davis said.
This news leaves real estate managers between a rock and a hard place as they struggle to keep their properties insured while also attempting to make money despite hiked premiums.
"There will continue to be disasters, and when you're in the business of property management, you want to be prepared," said Chuck Achilles, vice president of legislation and research for the Institute of Real Estate Management. "You don't want to be in the position of not having proper insurance."
NO REINSURANCE, NO REASSURANCE
The dual pressure of rising rates and lack of supply is the result of the spigot tightening on coverage throughout the insurance industry's sectors.
Formerly-before last year's Katrina, followed by hurricanes Rita and Wilma-primary insurers could count on something called reinsurance to help spread the risk of loss among companies, so one company wouldn't have to carry the entire burden: Reinsurance allows primary insurers to transfer all or part of their risk for loss to another insurer in order to get more coverage on policies they write.
In turn, the reinsurance market could get coverage from a secondary reinsurance industry called the "retro" insurance market. Aon's Davis said the retro market has virtually dried up.
Rating agencies responsible for assigning market security ratings to the insurance industry are now holding insurers to higher standards. The agencies raised the capital requirements for insurance companies and now assess insurers on their ability to provide coverage for multiple disasters-not just one-during a season.
Reinsurance providers are being held to some of the toughest standards because they endured an unusually large share of the burden in the latest rounds of storms, Davis said. When all is tallied, the reinsurance market may bear as much as half of the more than $40 billion in losses associated with Katrina. Typically, Davis said, the reinsurance market bears no more than a third of the losses.
Keeping insurers chomping at the bit are storm watcher forecasts predicting hurricanes are likely to become more frequent and severe in coming decades. Further, more than two thirds of the American population lives in coastal regions becoming even denser with residents.
Through 2025, the Gulf Coast population is projected to grow at a rate of roughly 20 percent, versus the midAtlantic population's estimated growth of around 5 percent, said Marcellus Andrews, an economist with the Insurance Information Institute, citing U.S. Census Bureau figures.
"Even if you didn't have a change in either the frequency or severity of the storms," Andrews said, "you're simply going to have more people exposed to whatever storms show up."
Property owners and managers who can't find adequate insurance may risk legal squabbles with lenders requiring certain levels of coverage. …