Hurricanes Katrina and Rita: Effect on Rating and Underwriting
May 2006
The insurance industry plays an important
role in natural disaster recovery. However, the effect of Hurricanes Katrina
and Rita on the insurance industry—both in terms of cost and claims—will be
felt for a long time to come. This first of three articles examines the effect
of the hurricanes on rating and underwriting. Part 2
deals with the hurricanes' effect on claims handling procedures, and
Part 3 discusses coverage disputes and pending litigation.
by Dana Harbin,
edited by R. Brent Cooper
Cooper & Scully
Hurricane Katrina crossed the Florida peninsula on August 25, 2005, as a
Category 1 hurricane. Upon entering the Gulf of Mexico, it gathered energy from
warm Gulf waters, producing a hurricane that eventually reached Category 5 status
on Sunday, August 28, shortly before making its second mainland landfall just
to the east of New Orleans on August 29. Immediately prior to landfall, Hurricane
Katrina had weakened to a Category 4, and its eye passed just slightly to the
east of New Orleans.
Despite the storm's slight weakening, the hurricane imposed unusually severe
wind loads and storm surges (and waves) on the New Orleans region and its flood
protection systems. The storm surge from Katrina caused catastrophic damage
along the coastlines of Louisiana, Mississippi, and Alabama. Before Katrina,
the most homes destroyed by any storm was 28,000, by Hurricane Andrew.1
Hurricane Katrina destroyed more than 200,000 homes and is estimated to be responsible
for $75 billion in damages, making it the costliest hurricane in United States
history.2
Katrina was also one of the deadliest storms since 1928, killing 1,417. As
of January 18, 2006, more than 3,200 people remain unaccounted for, so the death
toll may continue to grow.
Hurricane Rita came storming in September, making its approach near Cuba,
striking Florida, and then Texas and Louisiana. The storm surge reopened some
of the levee breaches caused by Hurricane Katrina a month earlier, and reflooded
parts of New Orleans. However, Rita weakened significantly as she approached
the coast, and the onshore damage was contained relative to Katrina.
Hurricane Rita killed 6 people and caused 113 indirect deaths. The property
damage from Rita estimates around $9 billion, which makes Rita the ninth costliest
storm in United States history.
Effect on Rating and Underwriting
The Louisiana Insurance Rating Commission reluctantly approved its first
post-Katrina increase in homeowners insurance in January 2006. The commission
voted 4 to 1 to allow ANPAC Louisiana Insurance Company to increase homeowners
insurance rates by an average of 23.3 percent statewide.
Arguably, the increase in rates will not recoup the losses caused by Katrina,
but may serve to stabilize the insurance market in those states most affected
by the hurricanes. Still, even viability in the market seems insurmountable
where it has been reported that the record $12.4 billion in claims from Hurricanes
Katrina and Rita in Louisiana alone is enough to wipe out all homeowners insurance
premiums paid in the state over the past 25 years and all profits ever earned
in Louisiana. Homeowners insurers in Mississippi are expected to pay $5.5 billion
in claims from Hurricanes Katrina and Rita, an amount equal to all homeowners
insurance premiums paid in the state since 1989.
Other factors that weigh on the likelihood of increased premiums in the coastal
states include the following:
- Predictions by meteorologists that hurricanes will be more frequent
and more intense for the next 15 to 20 years.3
- Uncertainty surrounding the ability to rebuild.
- Lawsuits, such as those filed by the Mississippi Attorney General Jim
Hood and others that seek payments for flood damage under homeowners policies
which contain long-standing and explicit exclusions for such losses. Insurers
are concerned that they could be liable for billions of dollars in losses
for which they have collected no premiums and have no reserves.
While the climate seems ripe for increased premiums due to the increased
losses caused by the hurricanes, several statistics indicate that the property/casualty
insurance industry's profitability for 2005 is extraordinarily high. The industry
apparently experienced an unexpected $6.3 billion increase in new capital.4
Louisiana Rules and Directives
The Louisiana Department of Insurance issued emergency rules prohibiting
all insurance companies from canceling or nonrenewing policyholders in storm-impacted
counties.5 Rule 23 specifically suspends the right
of any insurer to cancel or nonrenew property insurance covering a dwelling
located in Louisiana that sustained damage as a result of Hurricanes Katrina
and Rita until 60 days after the substantial completion of the repair and/or
reconstruction of the property or until the Emergency Rule is terminated by
the commissioner. This Emergency Rule specifically prohibits rate increases
until January 1, 2006, on existing insurance and allows the insurer to offset
the premium owed by the insured from any claim payment made to the insured under
the policy, except as relates to health insurance.
Recently, the Louisiana Commissioner of Insurance issued Directive 196,6
requiring insurers in Louisiana writing personal lines insurance to ignore all
unfavorable credit score entries that are related to Hurricanes Katrina and/or
Rita when considering the individual's credit history for underwriting or rating
of personal lines insurance. Still, Louisiana homeowners can expect a significant
increase in property insurance in 2006 to help bail out the LCPI plan and cover
the emergency loans issued to cover all hurricane claims.7
Texas Bulletins
The Texas Department of Insurance issued several bulletins to address the
potential rate and underwriting affects from Hurricanes Katrina and Rita. These
bulletins are listed as follows:
- Bulletin No. B-0042-05 (September
2, 2005) requires that insurers provide reasonable exceptions to the insurer's
rates, rating classifications, or underwriting rules for a consumer whose
credit information has been directly influenced by a catastrophic illness,
injury or death of spouse, child or parent, or temporary loss of employment
or other extraordinary event, and the insurer must consider only credit
information not affected by the event causing the loss of employment or
other extraordinary event. TDI encouraged insurers to accept verbal requests
in lieu of written requests to avoid placing additional burdens on hurricane
victims.
- Bulletin No. B-0044-05 (September
9, 2005) requires that insurers should not change commercial auto policyholders'
rating classifications and increase their insurance rates solely because
of temporary participation in relief efforts in Hurricane Katrina.
- Bulletin No. B-0045-05 (September
14, 2005) prohibits insurers from re-rating, canceling, nonrenewing, or
refusing property or casualty insurance due solely to participation in relief
effort of Hurricane Katrina.
- Bulletin No. B-0050-05 (September
21, 2005) encourages life, accident, and health insurers to suspend premium
payments and allow continuing insurance coverage to hurricane victims or
evacuees.
- Bulletin No. B-0053-05 (September
21, 2005) prohibits insurers from re-rating, canceling, nonrenewing, or
refusing property or casualty insurance due solely to an individual's status
as a victim or evacuee of Hurricane Rita.
- Bulletin No. B-0052-05 (September
21, 2005) requires that insurers provide reasonable exceptions to the insurer's
rates, rating classifications, or underwriting rules for a consumer whose
credit information has been directly influenced by catastrophic illness,
injury or death of spouse, child, or parent, or temporary loss of employment
or other extraordinary event, applicable to personal lines insurance. TDI
encouraged insurers to accept verbal requests in lieu of written requests
to avoid placing additional burdens on hurricane victims.
TDI explains that Bulletins 0044-05 and 0045-05 were written to address circumstances
where the insured participates in temporary relief efforts, but where the insured's
participation is more permanent causing "an increase in exposure that is the
result of a sustained activity, insurers should use prudence in reevaluating
the risk."8
The bulletins are only in effect during the time period set out in the Governor's
disaster proclamation, which was originally 30 days from September 20, 2005,
but extended by the Governor of Texas another 30 days on October 20, 2005.9
Part 2 of this series deals with the hurricanes'
effect on claims handling procedures. Part 3 discusses
coverage disputes and pending litigation.
Dana Harbin
is an attorney in the Dallas office of Cooper & Scully, P.C. where she specializes
in insurance coverage and bad faith involving all types of insurance policies,
both first and third party. Ms. Harbin earned her BA degree from the University
of Texas in Arlington and her JD degree from the University of Texas at Austin.
She can be reached at .
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