New Reality - After Sandy, Insurance Rates Will Rise and More Property Owners Will be Affected


In looking at Best Review’s world catastrophe map for 2012, I can’t help but be reminded of the devastation done to the Northeast by Hurricane Sandy in late October last year.

Sandy is estimated to have caused up to $30 billion in insurance covered losses, and 21 people lost their lives in the storm. The magnitude and severity of the devastation put tremendous pressure on insurance industry professionals, many of whom were also victims of the storm, but the storm response from the insurance industry and the Federal Emergency Management Agency was tremendous. In fact, according to the Insurance Information Institute, 93% of Sandy’s insurance claims have been settled. But that only tells a part of the story.

Often, the longer-term impacts of a catastrophe are not felt until the claims have been settled and things start to return to a new normal. In the case of Sandy, as has been the case in the past with other coastal events, there is a significant impact on the economics of coastal communities.

The National Flood Insurance program was created in 1968 by the federal government in order to provide flood insurance to homeowners at a fair rate. (Few private insurers provide flood insurance.) About 80 insurance companies participate in the plan by providing administrative services in return for a fee. All flood insurance policies written through the NFIP have the same terms and conditions. Losses are paid completely out of the government’s accumulation of funds.

Government subsidies of the NFIP resulted in artificially low prices in relationship to the risk, and this facilitated development along the shore and in shore communities. With this development came jobs, beautiful homes and year-round communities. It all worked for the most part, for a while.

Now, in the wake of Sandy, flood insurance premiums will begin rising significantly—an average of 20% per year until the program is again self-supporting. The correction is seen by some as unfair, coming on the heels of such devastation and impacting those affected by the storm the hardest. Additionally, flood maps are being adjusted to include more land area. Therefore, more homes will fall into required-flood-insurance areas.

Increasing flood insurance premiums are not the only factors affecting coastal economics. Insurance rates in the region are expected to increase to cover the losses faced by insurers and the rising costs of reinsurance premiums. Significant uninsured losses from Sandy could result in abandoned property, delays in rebuilding and a decrease in the real estate tax base. At the same time, local municipalities have incurred significant costs from the cleanup, emergency services and rebuilding of infrastructure.

The final result may be that some homeowners will simply not be able to afford to live at the shore and businesses may close. Coastal development likely will be negatively impacted; some areas may not be rebuilt at all.

As insurance industry professionals we need to be responsive to the post-Sandy economic environment, which likely will be evolving for several years. The most important thing we can do is to educate ourselves regarding the NFIP, changes in coastal insurance coverages and our clients’ needs, and to educate our clients (homeowners, property managers, business owners, municipalities and others.)

Responsive insurers and agents are organizing free seminars to educate the public on what’s coming and steps they can take to keep their premiums low. Other action steps include reviewing client coverages for adequacy and using Sandy lessons to help modify your own disaster preparedness plan.

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