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Katrina a Wake-up for a Troubled Industry
A storm has been brewing in the insurance
industry for the past several years. Most blame
it on Hurricane Katrina, but according to two
Robinson professors, Katrina was more like
the “straw that broke the camel’s back.” In
fact, they say, this storm first starting swirling
back in 1992 after Hurricane Andrew.
Andrew served as a wake-up call for those in the insurance
industry,” said Robert Klein, associate professor and director of
the Center for Risk Management and Insurance Research. “For
one reason or another, prior to Andrew the industry wasn’t
really paying attention to the growing risk and preparing for the
financial fallout from a big storm, and it caused a lot of problems
in Florida.”
At first the industry had a knee-jerk reaction and immediately
began to drop customers who lived along the coast. Then they
retrenched and began to reallocate their portfolios. “Most of
the insurers who covered home owners along the coast didn’t
have a lot of inland customers, so there was no way to offset the
hit that they took from Andrew,” said Martin Grace, professor
and associate director of the Center. From there a huge political
debate ensued over rates and other issues among insurers,
regulators, and legislators. Ultimately, however, Klein and
Grace said that substantial adjustments were made in property
insurance markets in Florida and other hurricane-prone states.
Insurers better managed their exposures to catastrophic losses
and were allowed to increase their rates in at-risk areas gradually
over the decade. According to the professors, by 2004 the
insurance markets seemed to largely stabilize. But then the 2004
hurricane season rolled in and dumped four major hurricanes
on the Gulf Coast; 2005, according to the Insurance Information
Institute, was the most intense hurricane season on record, with
27 named storms – 14 designated as hurricanes, including the
two grand dames, Katrina and Rita. Weather scientists added to
the concerns by warning that this pattern could continue. Aside
from the horrifi c images the country saw immediately following
Katrina, the impact from both hurricane seasons has created
a maelstrom among insurers, legislators, regulators, and home
owners in these high-risk areas.
According to their latest publication, “Increased Hurricane
Risk and Insurance Market Response,” published in the Journal
of Insurance Regulation, Klein and Grace say that in the wake of
these storms and the belief that the risk of more bad hurricane
seasons are yet to come, insurers are seeking to signifi cantly
decrease their exposure. “Some insurance companies are calling
for substantial rate increases and are pressing for government
measures to support the market,” said Klein. “Another group
is taking a more moderate position, while others are taking
a different approach and see it as a chance to get a stronger
foothold in the Southeast market.” According to the study,
legislators and regulators are pushing for a national catastrophe
reinsurance program augmented by state catastrophe funds and
other measures that would alleviate market pressures.
Continued on next page
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