Will it Ever End?: An Insurance Perspective on the 2004 Hurricane Season

Charley, Frances, Ivan, Jeanne- Floridians have had to indulge a few unwelcome guests as Mother Nature unleashed one hurricane after another within a two month period. The Sunshine State, to some, has been aptly renamed the Hurricane State. The Hurricane Season has yet to end, and Florida has already seen unprecedented activity and direct insured losses that may very well exceed 20 billion dollars.

Prior to this season, Andrew was the last major hurricane to hit Florida. The costliest natural disaster in U.S. history, Andrew caused $26.5 billion¹ in damages, but this season's hurricanes, adjusting for the time value of money, may get close to that figure. After all, hurricane season is not over yet, and already there are estimates that more than one in five homes in the State have been damaged. The number of claims are expected to hit 2 million, far surpassing Andrew's 700,000.

Now, new questions arise from within the industry and Insureds, including concerns about the impact on future premiums and market capacity. There is also some uneasiness regarding carrier insolvency. And, most importantly, there is the ultimate uncertainty as to whether our State and citizens can "weather the next storm."

While there are many issues to contend with, Tom Gallagher, Chief Financial Officer of Florida's Department of Financial Services, says that the Department is ready to assist residents. "To help Floridians with these disasters, we have ordered insurance companies not to cancel or non-renew homeowners policies through the hurricane season. In addition, no insurance policy may be cancelled solely as a result of claims filed because of these storms." This is very good news to Florida policyholders. Gallagher further asserts that insurance rates should not go up just because of the storms. He says, "Rates gone up just for rates' sake because of storms? That is not going to happen."

Still, others disagree. Bob Hartwig, Chief Economist for the Insurance Information Institute, predicts "there's going to be pressure on rates in Florida. The industry's resources need to be bolstered." Industry experts report, though, that effective and aggressive catastrophic modeling and financing throughout the past decade will leave most of Florida's insurers financially sound, even after the final numbers are in. Rate increases should be moderate and will largely be due to price increases within the reinsurance marketplace, which offers insurance products to primary insurers to fund losses in excess of specified retained amounts. "Hurricane Andrew was a great industry lesson," said Karlene Lawrence of Setnor Byer Insurance & Risk, "after 1992, insurers increased rates to rebuild surplus and fund future losses, developed stringent underwriting standards, and built reliable and affordable risk financing programs, in part, due to the formation of the Florida Hurricane Catastrophe Fund, which reimburses insurers for a portion of their hurricane losses."

It also should be noted that the property and casualty industry has had record performance in the most recent quarters, with a growth in surplus, and 15% return on equity. This recent financial performance is, in part, why the industry has the capacity to pay the losses caused by the storms.

So far, it seems that the insurance companies, although overwhelmed by the volume of losses, are doing their part in financing our State's recovery. Of course, there are also costs associated with the four disasters and recovery that are either uninsured, or not necessarily a subject of insurance, such as the downturn in a local economy.

The question arises, often, however, as to whether insurance can or should finance a larger percentage of losses. In fact, many insureds are questioning the policies they've purchased, concerned with either an uninsured loss, or for those not damaged by the storm, questioning the extent to which their coverage would have responded. Commercial policies are a cumbersome and complicated reading, at best, but a reasonable perspective to advance regarding the extent to which an Insured should rely on insurance for funding a loss, is that if insurance is available, and affordable, it should be considered, and weighed against the probability and severity of a potential loss.

Now, after the storm, people should consider reviewing their insurance choices, and along with their Agent or Consultant, revisit their financing options, and seriously consider alternatives for financing certain risks. For some, affordable alternatives to insurance to finance loss may be a month's worth of income in reserve. For others, it may be a satellite back-up for communications systems, generators to maintain power, alternative premises to operate from, or redundancy in suppliers or vendors.

Unfortunately, many events, whether precipitated by a storm or other catastrophe, are not covered within the basic structure of most policies, particularly, commercial property policies; and the insurance, if available, is often cost prohibitive, particularly when one considers the number of years of increased premiums one would have to expend for an unknown loss of some unknown magnitude, triggered by any potential number of events.

Although not a comprehensive list, a brief overview of a standard commercial property policy reveals that none of the following are guaranteed, automatic offerings, and each insured should take the time to address recovery systems for dealing with potential loss resulting from : spoilage of perishable stock, whether from off-premises power or water failures, or a machinery accident; profits in finished stock; rising waters (flood); electrical surge; reproduction of electronic data; order by civil authorities that interrupt business when adjacent properties are not damaged; foundations, underground pipes; outdoor or detached properties; demolition; debris removal; and ordinances or laws that direct the destruction of a property or requires a reconstruction to newer code.

Business Interruption Insurance, often viewed as a panacea for income replacement, is actually quite restrictive in most offerings, and when broadened to extend to respond to a broader set of occurrences, can actually become unaffordable. This insurance, in the form generally provided under standard industry policies, requires damage to an insured location or property. Damage to other properties, whether the property of a vendor upon which the insured relies on for supplies, or off-premises utilities, are not automatically included. Additionally, the business interruption form, as generally purchased, provides for little if any payment after a business is repaired. What of the weeks and months to rebuild a customer base? Business Interruption from the breakdown of equipment, whether the breakdown emanates from the machine or an off-premises utility, is not an automatic offering, nor is business interruption from damage to electronic data. A bit overwhelming, yes?

So, before the next Hurricane Season, each Insured should consider requesting a clarification of their policy language, and what operating and recovery alternatives or redundancies they should build into their enterprise in order to guarantee their survival in the event of a catastrophe. For an in-depth analysis of the risks that affect you and your business, whether an Insured or friend of Setnor Byer Insurance & Risk, call our offices at 1-888-253-8498.


¹ Not adjusted for inflation, from the NOAA Technical Memorandum.