You may not live in Florida or Texas, but your insurance rates could spike because of hurricanes
You may not live in one of the areas hit by hurricanes Harvey and Irma, but that doesn't mean your insurance rates will go unscathed.
Motorists and homeowners throughout Texas and Florida as well as those who live anywhere from Alabama to Wyoming could see their premiums rise as insurance companies pay out billions of dollars to customers whose properties were destroyed or damaged. For example, hurricane winds could damage your roof or flip over your car.
The estimated US insured losses, excluding any National Flood Insurance Program claims, are US$20 billion to US$25 billion from Harvey and US$40 billion to US$60 billion from Irma, according to JLT Re, a global reinsurance brokerage and consulting firm.
Experts say that insurers are looking to stay flush as they cover their reinsurance policies which keep them insured and able to mitigate risk while trying to prepare for any extreme future weather that could harm their customers.
"There's an increased perception of risk. There's less capital supporting the insurance industry, and there's equal demand," says David Havens, managing director of investment bank Imperial Capital. "The way insurers respond to that is to raise prices because they need to replenish."
People living in the areas slammed by the hurricanes are most at risk for auto and homeowners rate increases. But because insurance is handled by each state individually, people elsewhere in Texas and Florida could see a bump, too. Drivers in states adjacent to those Harvey and Irma hammered also may face rate hikes because some insurers calculate car insurance rates regionally.
Insurers can't jack up premiums in random states to make up for large payouts to Harvey and Irma victims. But a ripple effect can happen.
"They can't go to Nevada and say, 'We need to raise rates here because of money in Texas.' They could say, 'We've lost so much in Texas that we don't want to write as much business in Nevada,'" Havens said.
There is US$1.3 trillion in capital ready to support these losses, according to Havens.
VARIETY OF REASONS
It is too early to know how much Harvey and Irma could raise rates, but an analysis of average insurance premiums in states hit by some of the costliest hurricanes in US history shows what could happen. For example:
New Jersey homeowner: US$926 in 2011, the year before Hurricane Sandy; US$1,068 in 2013, the year after.
New York motorist: US$1,108.64 in 2011. US$1,181.86 in 2013.
The higher dollar amounts can't be blamed solely on extreme weather. Insurance premiums can go up for a variety of reasons, experts say. Replacement costs of destroyed homes may be larger because of elevated construction and labour costs, for instance, and distracted-driving across the United States contributes to auto insurance premium hikes.
Insurance companies' concerns over their own cash flows also stem from the long, low-interest environment, which has limited the returns on their investments, CFRA insurance equity analyst Cathy Seifert explained.