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Thursday, Mar 28, 2024
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RIPPLE EFFECTS

Hurricane Katrina caused more than $200 billion of destruction along the Gulf of Mexico coastline.

The repercussions are expected to ripple to Orange County for owners of commercial property.

In fact, the tab to pay for commercial property insurance claims filed in the Gulf Coast should be felt by nearly anyone who owns property in the U.S., according to local insurance brokers. The disaster was a shift for insurers, who had enjoyed relative calm since the 2001 terrorist attacks.

“We had a nice ride,” said Greg Pe & #324;a, president of the commercial real estate insurance unit of USI of Southern California Insurance Services Inc. in Irvine. The brokerage is a unit of parent USI Holdings Corp. in Briarcliff Manor, N.Y.

But Hurricane Katrina has changed all that.

“Rates will probably stiffen up because of the catastrophic losses that have affected the U.S.,” Pe & #324;a said.

In OC, brokers are bracing for the ripple effects of the disasters, with many forecasting a rise in commercial property insurance costs.

Katrina alone is expected to cost property and casualty insurers an estimated $34 billion in insured property losses, making it the costliest catastrophe ever in the U.S., according to preliminary estimates made by a unit of Jersey City, N.J.-based Insurance Services Office Inc., which collects loss information from disasters.

“Orange County businesses will have to pay some share of this, as will businesses in every other county in the U.S.,” said Mike Betlinski, managing director for syndication in Southern California for Irvine-based Aon Risk Services Inc.

“Hurricane Katrina will have a tremendous impact on property insurance nationwide,” he said.

Losses from more recent Hurricane Rita were much less,pegged at about $5 billion, according to some estimates. Hurricane Ivan in fall 2004 caused about $13 billion in damage in the U.S. Insured losses from the 2001 terrorist attacks totaled roughly $32.5 billion, according to Insurance Services Office.

Some OC brokers said Katrina could push rates higher by as much as 10% to 15% in the coming year.

Others said insurance costs could rise a moderate 5%.

“It’s still pretty early to tell,” said Bob Dennerline, president of Armstrong/Robitaille Business & Insurance Services in Fullerton. “I’ve not seen any impact yet, but a lot depends on what insurance companies pay out in claims.”

Insurance companies already are making a bid to raise rates, said Stephen M. Hobbs, managing director of Marsh Risk and Insurance Services in Newport Beach.

“I’d say that whether you have a location directly impacted, or had nothing impacted, you are likely to see an effort by insurance companies to raise rates,” Hobbs said.

The biggest changes are likely to come after Jan. 1, according to local brokers. That’s when so-called “reinsurance treaties” expire.

Insurance companies share the risk of the coverage they provide with reinsurers, which essentially act as insurance for insurers. Most insurers have pacts with reinsurers to cover catastrophes such as earthquakes, hurricanes and wildfires that individual insurers can’t pay out of their own pockets.

Laws prevent insurance companies here from increasing California rates directly to recoup costs from claims filed for events in other states, according to Bob Griffin, vice president of the Property Casualty Insurers Association of America, a Des Plaines, Ill.-based trade group that represents 40% of the U.S. industry.

“I’d like to say that it’s cut and dry and that the increases won’t be included. But that’s not the way it is,” Griffin said.

Regulators in California will take a close look to see if any rate hikes are justified or if they simply are a product of Katrina, Griffin said.

“Even though the risk of a hurricane is not a possibility in California, the size of increase might be justified,” said Philippe Jorion, an expert on insurance risk and senior associate dean with the Paul Merage School of Business at the University of California, Irvine.

“The companies have to achieve a reasonable rate of return on capital,” Jorion said. “All of these hurricanes are eating at the capital of insurance companies.”

One way insurance companies in California can recoup losses from the hurricanes without obvious rate hikes is through their offer of discounts or credits for things such as a sprinkler system upgrade or the use of building materials that are considered safer than others.

Nearly all insurance brokers and observers agreed discounts that commercial property owners received in the past likely will disappear,or, at a minimum, get a second look.

“You won’t see the same extent of aggressive credits being allowed,” said Pe & #324;a of USI. “If you want to write more business, you may be more liberal with the use of credits than what you might otherwise want. As market rates rise, you may not be as liberal to get business, so you may cut your credits.”

Another factor that could cause property insurance rates to rise: the pending expiration of the 2002 Terrorism Risk Insurance Act.

The federal law was a response to the 2001 terrorist attacks. It backed insurance coverage for companies that were having a tough time getting insurance because they were in areas considered at high-risk for terrorism.

If Congress doesn’t extend the law after the end of the year, it’s likely that many insurers will exit the market because they don’t have the backing of the federal government. Without the coverage, insurers likely would tweak formulas for general property insurance coverage.

“Sixty percent of our clients are taking up the coverage,” said Hobbs of Marsh. “If it isn’t renewed, we don’t think it will stand alone. There isn’t sufficient capacity to support the market as pricing wouldn’t be viable.”

Financial institutions, healthcare providers and commercial real estate owners have been the main buyers, he said.

California Insurance Commissioner John Garamendi is pushing for a national program for several types of insurance.

Under his proposed plan, state and federal funds would be set aside to serve as a backstop for insurers in the event of catastrophes such as Hurricane Katrina, a terrorist act or earthquake,events that some say are too big for a private insurer to handle.

“Katrina gives us a very clear example of why we need a national catastrophe insurance program that spreads the cost of national catastrophes across the U.S.,” Garamendi told the Business Journal.

Garamendi plans to host a conference in San Francisco later this month to explore a national catastrophic insurance program. Lawmakers, insurance commissioners from other states and company executives are expected to attend.

Garamendi said he’s seen support from counterparts in Florida, Illinois and New York.

“Stay tuned,” he said.

In the meantime, some local companies could be surprised when they renew their property and casualty insurance policies next year because of direct exposure to Katrina, according to brokers.

A number of local companies had operations in the region, including Foothill Ranch-based Oakley Inc., Irvine-based Taco Bell Corp., Santa Ana-based Corinthian Colleges Inc. and clothing retailers Pacific Sunwear of California Inc. of Anaheim and Wet Seal Inc. of Foothill Ranch.

“As a result of Hurricane Katrina, we closed our only school in New Orleans, which had over 500 students,” said Anna Marie Dunlap, senior vice president in charge of investor relations with Corinthian Colleges. “We are currently negotiating with our insurance provider regarding payment for damages we incurred as a result of the hurricane. We are not seeing higher rates at present, but on the other hand, our policy is not yet up for renewal,” she said. “It is too early to say whether our rates will go up.”

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