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With storm losses at $8B, insurance rate hike looms

While the state hasn’t been hit as hard as some others, Ohio policyholders can expect to see increases.

Claims adjuster Chris Shopshear (left) of Erie Insurance surveys hail damage on a Centerville home Wednesday while contractor Shane Moore of Airway Construction takes notes. Jerry Dice said the repair estimate is $16,000-$17,000. Staff photo by Chris Stewart

Chris Stewart/Dayton Daily News Staff Photogra Claims adjuster Chris Shopshear (left) of Erie Insurance surveys hail damage on a Centerville home Wednesday while contractor Shane Moore of Airway Construction takes notes. Jerry Dice said the repair estimate is $16,000-$17,000. Staff photo by Chris Stewart

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By Randy Tucker, Staff Writer Updated 11:30 PM Thursday, June 2, 2011

The recent spate of natural disasters in the U.S., including the severe thunderstorms and tornadoes that ripped through Massachusetts on Wednesday, could drive up homeowners’ insurance rates in Ohio, some experts say.

While most of the damage has been confined to areas outside the Buckeye State, each new catastrophic event pushes large mutual insurers closer to the tipping point of requesting rate increases to cover their losses — even in states far removed from the disasters, said John “Smitty” Smith, a 30-year insurance industry veteran and principal agent at Morgan Hubble Smith Insurance in Columbus.

“The big companies suffer the biggest losses, and they spread that risk around to everybody,” he said.

While insurance companies are regulated by state laws, regulators don’t set rates. And insurers can request rate hikes based on a variety of factors, including the depletion of capital reserves required to cover catastrophic claims.

“We review rates, and those rates have to be actuarially sound for our approval,” said John Charlton, a spokesman for the Ohio Department of Insurance. “As long as they can actuarially prove that there should be an increase, that’s what we look at.”

Smith said many of the big insurance companies could easily justify across-the-board rate increases based on the staggering losses they’ve sustained over the past several years.

The unusual number of severe storms that have devastated parts of the South, Midwest and East Coast already have generated nearly $8 billion in insured losses this year alone, according to industry estimates.

That’s close to the total of all insured losses last year, the third consecutive year in which U.S. property and casualty insurers incurred more than $9 billion in losses, according to credit rating agency A.M. Best.

Those figures don’t include potential losses from the hurricane season, which began Wednesday. Forecasters are predicting an active Atlantic hurricane season.

Stiff competition, so far, has kept rates in Ohio among the lowest in the country, said Pamela Stephens, vice president of Stephens Insurance Agency in Dayton. But as catastrophic losses continue to mount, so does the incentive for insurers to raise rates.

“We’re already starting to see rates inch up this year,” Stephens said. “There’s been such a multitude of weather-related events in the past several years that insurance companies have to spread the cost.”

The main driver of those costs is the demand for reinsurance, which insurance agencies buy as added protection against catastrophic events, Smith said. As demand increases, the rates on reinsurance begin to rise and insurers are likely to pass those costs on to consumers, he said.

“If the loss is anything over a couple of million dollars, the insurance agency is going to call Swiss Re or General Re and turn in a claim on their reinsurance policy,” Smith said. “The reinsurance companies will pay, but the private insurance companies are going to get a surcharge when they go back to negotiate their rates for reinsurance.”

Reuters Research Inc., which conducts company research for investors, recently forecast a rise of up to 10 percent in the cost of reinsurance contracts that insurers will begin to renew this summer.

Blake Zitko, a spokesman for the nation’s largest insurer, State Farm, declined to speculate on how the cost of reinsurance might impact rates for the company’s more than 2.8 million property and casualty policyholders in Ohio.

However, he said: “When we set our rates, the first and foremost goal is that when a loss does occur, we have the capital built up so that we can help people recover.”

Saul Adelman, an associate professor at Miami University and former instructor in the Department of Risk Management and Insurance at the University of Georgia, agreed that consumers might see higher premiums if catastrophic losses continue to climb.

But, he noted, most of the big insurance companies still have the cash reserves to absorb big losses before they are forced to raise their rates.

“What we believe is catastrophic may not be financially catastrophic to the insurance companies, depending on the size of the company,” Adelman said. “It’s all relative.’’

He said most big insurers can withstand periods of unusually high numbers of catastrophic events because they stockpile capital in less volatile years.

“This might be an abnormal year, in terms of the frequency and severity of tornado damage, but you’ve got to remember that there are other years where tornado activity has been well below average,” he said.

Adelman also pointed out that the insurance industry anticipates a certain number of disasters each year, based on forecasting models. But he acknowledged that this year’s damage would have been hard to predict.

State Farm, for example, said claims this year from hailstorms, windstorms and tornadoes are already equivalent to the seventh most costly homeowners’ catastrophe in the company’s 90-year history.

Overall, State Farm has paid out more than $2.5 billion in catastrophe claims this year to nearly 300,000 customers. And claims are still being processed, including claims from the May tornadoes in Joplin, Mo.

“The country has been hit hard with an unprecedented succession of horrible weather and horrific losses,” Brian Boyden, State Farm executive vice president, said. “From the claims volume and types and extent of damage, you can easily characterize these storms as a spring hurricane.”

Contact this reporter at (937) 225-2437 or rtucker @DaytonDailyNews.com.

A costly year

Insured losses are predicted to be more than $10 billion by the end of 2011, according to Eqecat Inc., a catastrophe risk modeling firm.

One “relatively minor” hurricane could push catastrophe losses in 2011 above the $13.6 billion paid out in 2010, according to the Insurance Information Institute.

Insured losses for the week of April 22-28, which included Alabama’s tornadoes, were estimated at  $3.7 billion to $5.5 billion by AIR Worldwide, a risk modeling and consulting firm.

The industry defines catastrophes as any single event with $25 million or more in insured losses. The biggest catastrophe to hit the industry was Hurricane Katrina, which generated $45 billion, adjusted for inflation, in insured losses for houses, businesses and vehicles.

Source: New York Times

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