Sandy Seen Lifting Insurance Prices Amid ‘New Reality’

Nov. 1 (Bloomberg) -- AMS-Certified Meteorologist Bonnie Schneider gives us perspective on the costs of superstorm Sandy in relation to Hurricanes Katrina and Andrew. She speaks on Bloomberg Television's "Bloomberg Surveillance."

Sandy, the Atlantic superstorm that caused flooding, damage and blackouts throughout the U.S. Northeast this week, may lead to higher insurance rates and tighter terms in the affected areas.

Carriers that underwrite business property may be “pushing rate” in the aftermath of Sandy, said Al Tobin, managing principal of the property practice at Aon Risk Solutions, the insurance brokerage arm of London-based Aon Plc. (AON) Insurers and their commercial clients are still assessing damage.

“I also suspect they’re going to be looking hard at deductibles” and limiting the amount of flood coverage they write, Tobin said in a phone interview. Aon, the world’s largest insurance broker, helps arrange coverage for business customers.

Sandy, responsible for at least 70 deaths in the U.S., knocked out power to more than 8 million customers in 20 states from South Carolina to Maine and disrupted travel and transit systems, including New York City’s subway. New York Governor Andrew Cuomo said Oct. 30 that losses from the storm and Hurricane Irene last year show that the region should rebuild in a way that can withstand future disasters.

“We have 100-year floods every two years now,” Cuomo said at a news conference in Manhattan. “We have a new reality when it comes to these weather patterns and we have an old infrastructure, and that is not a good combination.”

Insured losses from Sandy may be $7 billion to $15 billion, including damage to property, business interruption costs and expenses for displaced residential customers, according to catastrophe modeler AIR Worldwide. The higher figure would make Sandy the third costliest U.S. hurricane, after Katrina, which caused more than $40 billion in losses in 2005, and 1992’s Hurricane Andrew.

Industry’s Response

“Insurers respond to events such as this,” said Linda Kornfeld, a partner at Jenner & Block LLP who represents businesses in insurance coverage disputes, said in an e-mail. “Hurricane rates changed after Katrina. So, too, did terrorism coverage after 9/11.”

American International Group Inc. (AIG), Travelers Cos., Liberty Mutual Holding Co. and Zurich Insurance Group AG are among the largest providers of commercial coverage in the U.S. Travelers, the only insurer in the Dow Jones Industrial Average, said business insurance contributed $720 million in pretax operating income in the third quarter.

At AIG, the bailed-out insurer, the figure was $594 million in the three months ended June 30. The New York-based company is set to announce third-quarter results today.

The industry has enough capital to shoulder claims and capacity to continue writing policies, said Michael J. Hudson, property placement practice leader for Marsh Inc., the insurance brokerage arm of Marsh & McLennan Cos. (MMC) Insurers including Travelers and Chubb Corp. (CB) benefited from reduced natural- disaster costs this year compared with 2011’s record losses.

Market Impact

“There’ll be some impact on the market,” Bart Hedges, chief executive officer of Greenlight Capital Re Ltd. (GLRE), said in an interview about Sandy on Bloomberg Television. “There’ll be some uptick, but I don’t think it’s going to be a big, market- changing event.” Greenlight is the reinsurer that has hedge- fund manager David Einhorn as its chairman.

Before Sandy, commercial property insurance rates looked like they might hold steady or rise as much as 5 percent through the end of the year, said Dave Finnis, a national property practice leader at the North America division of broker Willis Group Holdings Plc. (WSH)

“I don’t think that’s going to change,” he said in a phone interview.

Commercial-property insurers had already begun to increase prices in the Northeast before Sandy as a result of a catastrophe model change, said Marsh’s Hudson. Insurers may study the amount of risk they’ve underwritten in certain areas to limit future claims, he said.

“This is falling on the heels of a rate increase,” Hudson said. “It’s not to say that the industry won’t try for more.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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