Insurers’ policy costs soar

Catastrophic hurricanes have made insurance policies for insurers more expensive

By BEN WERNER

bwerner@thestate.com

In the wake of two devastating hurricane seasons, homeowners have been confronted with higher insurance premiums — but now insurance companies are feeling the sting.

Nearly every insurer covering homeowners also has its own insurance policy to cover itself from catastrophic losses.

The product, called reinsurance, is a backup plan to make sure the insurance company can pay out all the claims after a disaster such as an earthquake or hurricane.

While homeowners’ costs already have gone up, the companies’ expenses for reinsurance are in many cases skyrocketing. The increases leave insurance companies no choice but to pass the additional costs onto customers, including S.C. homeowners.

“Any increases you see going forward will be due significantly to reinsurance,” said Bruce White, spokesman for State Farm Insurance.

Until this week, South Carolina’s insurance community had — for the most part — weathered the rising expenses for reinsurance.

That ended when Florida Select Insurance Co., a relatively small insurer in the state, was barred from writing new policies in South Carolina and Florida. One of the reasons was its inability to buy reinsurance.

The company still can renew existing policies, but now it is being managed by regulators in its home state of Florida.

The reason reinsurance is getting more expensive is that more companies seek more coverage. Also, the reinsurance industry is trying to protect itself from another devastating hurricane season.

“In the wake of hurricanes, demand has increased while the capital required to fund reinsurance has decreased,” White said.

State Farm accounts for nearly a third of South Carolina’s homeowner market. The company buys only a limited amount of external reinsurance policies. Its other, more profitable lines, such as auto insurance, provide reinsurance to the homeowners line of business.

The series of hurricanes hitting Florida in 2004 caused insurance companies to lose about $20 billion. A year later, after Hurricane Katrina, the industry lost another $61.2 billion.

However, last year, about half of those payments came from catastrophic reinsurance policies, according to the Insurance Information Institute.

Reinsurance companies, such as AON Corp., ING Group and Benfield Group, are trying to recoup some of those losses while gearing up for another hurricane season, said Allison Love, an industry spokeswoman.

Susan Merrill, spokeswoman for S.C. Farm Bureau Mutual Insurance, summed up her industry’s reaction: “It was like getting punched in the stomach.”

Merrill would not specify the exact amount of Farm Bureau’s increase but described it as “dramatic.”

Eleanor Kitzman, director of the S.C. Department of Insurance, said in a statement: “This is an issue that we continue to monitor closely.”

For Allstate, South Carolina’s second largest insurer, the cost of changing how its reinsurance policies are structured is expected to run about $600 million nationally, an increase of about $400 million from last year’s reinsurance expense.

Already this year, company officials, including Tom Wilson, chief operating officer, announced Allstate is seeking to cover such increases by including the more expensive reinsurance costs in premium rates. These rates, in most cases, need to be approved by state regulators across the nation.

However, Allstate still is searching for ways to offset some of the reinsurance costs, said Renita Q. Ward, a company spokeswoman.

For Allstate customers, though, the bottom line is that in many states, including South Carolina, premiums might increase.

Ward said the process of evaluating premiums is complicated, so not all customers will see rates increase. Coastal areas are more at risk, but even along the coast, not all beachfronts are considered equal.

Several factors, including neighborhood locations, proximity to bodies of water and past storm activity are considered when setting premiums, Love said. Also, the age, value and construction materials of each home are used to calculate rates.

Reach Werner at (803) 771-8509.