Catastrophic Insurance--Challenges Evolve

Unprecedented property insurance rate increases of 200% to 500% in some coastal areas have been driven by insurance-company exposure to catastrophic events. These rate increases have shocked commercial property owners and put a strain on their properties’ bottom lines.

The increased insurance rates are an unfortunate byproduct of the severe 2005 storm season, the most active since record-keeping began in 1851. It was also the most costly year on record for the insurance industry, with insured losses from Hurricane Katrina at $40.6 billion and total catastrophe losses for the year totaling $61.2 billion (source: Insurance Information Institute). As with the US in the early stages of a 15-year cycle of projected increased hurricane activity, meteorologists are forecasting another very active storm season for 2006.

The term “catastrophe” in the property insurance industry is a natural or man-made disaster that is unusually severe and that affects many insurers and policyholders. A single event is designated a catastrophe when claims are expected to reach a certain dollar threshold, currently set at $25 million. Last month’s Washington Insider, by Jeanne McGlynn Delgado of the National Multi Housing Council, treated how o manage insurance hikes. I thin it’s important to build on that foundation with consideration of some of the forces impacting catastrophic insurance pricing and the public policy debate surrounding this issue.