People have been talking about the effect of Katrina on Florida home owners insurance prices. Katrina did pass through Florida causing some 900 million in damage on the way to Louisiana and Mississippi, but that's not what they are talking about. What everyone seems to be concerned about is the effect of a $26 + billion dollar hit to the insurance industry will have on Florida homeowners prices. What is funny is that this is the opposite of what usually happens. I remember after Andrew, the Nebraska Insurance Commissioner saying that he would scrutinize rate filings to make sure that companies were not trying to make up for the Florida losses by charging Nebraska insured extra. Competition between companies with Florida exposures and those without Florida exposures will tend to do that all by itself. According to the Bradenton Herald, industry officials are saying that Katrina will not effect Florida's homeowners rates.
This just can not be true. First, reinsurance prices will rise just like they did after Andrew and 9/11. (The industry official notes this, but seems to underplay its importance.) The reinsurance price increase will have an effect on insurance prices nationwide. Secondly, one of the major components of the cost of Katrina is going to be the cost of rebuilding thousands (and maybe hundreds of thousands) of structures. Think lumber! This will have an effect on the building industry nationwide and will make construction of anything more expensive. If I were a Florida insurer I’d raise homeowners insurers prices just to cover the effects of price increases for reconstruction for the next year or two. It will take that long for the reconstruction to be completed. Further, there is likely to be an worsening of Florida’s home owners insurance availability crisis. Currently some insurers won’t sell in certain parts of the state while 7 insurers have exited the homeowners business this year and 30 have asked for rate increases.
Now a last thought … suppose you were an investor and you knew that the insurance industry needed to be recapitalized, what type of return would you demand to give them your money? One commensurate with a low risk industry or one with a high risk industry? This, too, will have an effect on the price of insurance especially for the publicly traded stock companies.
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