After insurance companies suffer big losses, they often sock customers with premium hikes. As Hurricane Ike approached Texas in September, insurance brokers feared the storm would jolt property owners around the country. But early estimates of losses from Ike have only approached $16 billion, a fraction of the $60 billion in claims racked up after Hurricane Katrina struck with devastating force in 2005.
Brokers say the insurance industry has enough reserves to handle the latest storm losses without raising premiums sharply. “Unless we have another huge event like Katrina, premiums should not spike,” says Jeffrey Alpaugh, managing director of New York-based insurance giant Marsh and head of its global real estate practice.
In the months before this year's hurricane season, many building owners got big reductions for property policy premiums, including coverage for earthquake and wind damage. The cycle of declining costs was rooted in the aftermath of Katrina, when New Orleans was flooded. With mounting claims, insurance companies raised premiums around the country.
The increases were steepest in hurricane-prone areas. In Miami, rates rose from an average of 44 cents per sq. ft. in 2004 to $1.07 in 2007, according to the Building Owners and Managers Association. Costs climbed even in regions with little risk of tropical storms. In New York, costs rose from 46 cents per sq. ft. in 2004 to 52 cents in 2007.
Meteorologists warned that more hurricanes could strike in 2006 and 2007, but many of those storms veered away from the U.S. coastline. When big losses didn't materialize, insurance companies' profits swelled, and the healthy returns attracted investors to the insurance business.
Insurers' competition for business turned to bidding wars. Insurance companies write policies to get the premiums, says John Racunas, senior vice president of Lockton Companies, an insurance broker. “As competition increases, underwriters have to lower premiums to win business.”
According to Marsh, from the third to the fourth quarter of 2007, premiums declined by 20% to 30% for buildings unaffected by hurricanes and other catastrophes. In the second quarter of 2008, rates dropped by another 20% to 30%.
For large organizations with more than $250 million in insured values, premiums dropped by 15% to 25% in the fourth quarter of 2007. Over the same period, general liability premiums dipped by 5% to 15%. Declines were greater for property premiums because they experienced the biggest increases after 2005.
Industry executives say that the rate of price declines has slowed. With recent property policy renewals, declines have been around 3%, says Michael Newman, president and CEO of Golub & Co., an owner in Chicago. “It could be that we are near the bottom of the price declines for this cycle.”