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Report: Californians unprepared for next disaster

Estimates for insured damage from Katrina in New Orleans and along the Gulf Coast have soared to a range of $40 billion to $60 billion. And they could go higher.

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More than 150,000 properties have been flooded, the firm estimated, surpassing the record 137,000 set in 1927 from flooding and levee failures on the lower Mississippi River.

Hurricane Katrina is expected to cost the insurance industry about as much as the four major hurricanes of the 2004 Atlantic hurricane season -- $23 billion –but more of the cost will be borne by reinsurers. Catastrophe reinsurance, the type of reinsurance protection primary insurers purchase for disasters, is designed to respond to the large infrequent disaster, such as Katrina, rather than a large number of smaller events. Last year’s hurricane losses did not trigger payments under their reinsurance contracts for many insurers because, like homeowner and commercial insurance policyholders, they have a deductible or retention amount that must be met for each event before reinsurance kicks in.

As of September 23, 2005, nearly a month after Hurricane Katrina struck, the death toll currently stands at 1,069.

THE TEN MOST COSTLY HURRICANES IN THE UNITED STATES

1 1992, Aug. 23-24, 25-26 FL, LA, MS Andrew $15.500 $20.869
2 2004, Aug. 13-15 FL, NC, SC Charley 7.475 7.475
3 2004, Sep. 16-21 AL, FL, GA, OH, PA, NY, NC, 8 other states Ivan 7.110 7.110
4 1989, Sep. 17-18, 21-22 U.S. Virgin Islands, PR, GA, SC, NC, VA Hugo 4.195 6.391
5 2004, Sep. 5 FL, GA, SC, NC, NY Frances 4.595 4.595
6 2004, Sep. 15, 25 PR, FL, PA, GA, SC, NY Jeanne 3.655 3.655
7 1998, Sep. 21-28 PR, U.S. Virgin Islands, AL, FL, LA, MS Georges 2.90 3.361
8 1995, Oct. 4 FL, AL, GA, NC, SC, TN Opal  2.100 2.603
9 1999, Sep. 14-17 NC, NJ, VA, FL, SC, PA, 10 other states Floyd 1.960 2.222
10 1992, Sep. 11 Kauai and Oahu, HI Iniki 1.600 2.154

(1) Adjusted to 2004 dollars by the Insurance Information Institute.  Dollar figures in billions.

Source: ISO; Insurance Information Institute.

Higher insurance rates likely

In Hurricane Katrina's wake, auto and homeowners premiums could climb across the United States. Homeowners and car owners across the U.S. may see a spike in their insurance premiums following Hurricane Katrina, according to a report in the Wall Street Journal.

Current estimates from risk modeling agencies pin insurable losses from the hurricane at $40 billion to $60 billion -- making it the costliest storm on record to hit the U.S. If history is any indicator, insurance premiums should climb, with increases in states beyond just the affected region.

After Hurricane Andrew in 1992, homeowners policies became increasingly costly and insurers also began to offer less-generous policy provisions and higher deductibles in the state of Florida.

Insurers, however, are in a better position today than they were in the wake of Hurricane Andrew. With $400 billion in capital, insurers are well positioned to handle claims.

Allstate Insurance Co.’s Chairman and Chief Executive Edward Liddy told the Journal that risks were "underestimated" in areas like New Orleans, which will make the cost of insurance go higher in the region.

But consumer groups and regulators are likely to fight any nationwide rate increases and even rate increase in those areas devastated by the storms, saying that the industry managed to be profitable despite last year's barrage of hurricanes and falling homeowners rates in areas outside of Florida.

Analysts expect the insurance industry to be able to pay Katrina claims without any significant weakening of its overall financial strength. According to the rating agency, A.M. Best, even high-end estimates of the industry’s Katrina-related losses represent only about 6 percent of its policyholder surplus as of June 30, 2005. Policyholder surplus is the financial cushion that protects it against unexpected or catastrophic losses.

Damage from Katrina in New Orleans and along the Gulf Coast are conservatively estimated to be from $40 to $60 billion.

Flood insurance essential

If homeowners were to take away one lesson from Hurricane Katrina's destruction, it's that flood insurance should be considered a necessity, not a luxury.

But with the National Flood Insurance Program expected to pay out billions of dollars in claims to cover the flood damage in Louisiana and other hard-hit states, homeowners that are suddenly interested in the extra protection may be forced to pay more for coverage.

The National Flood Insurance Program is administered by the Federal Emergency Management Agency, a unit of the Department of Homeland Security. With flood insurance largely unavailable in standard homeowner's policies, the NFIP -- which sells policies directly or through individual agents -- assumes all risk of damages in the case of a flood.

According to a recent study by the Center on Federal Financial Institutions, the program had about 4.6 million policies in place, covering over $743 billion in assets, as of the end of 2004. Annual premium collections were valued at about $2 billion.

But Katrina's fury will almost certainly top that figure when it comes to claims.

Robert Hartwig, chief economist at the Insurance Information Institute said that the NFIP could pay out over $3 billion as a result of Hurricane Katrina, its largest payout in history. While that may seem like a small number given estimates by catastrophe modeling firms for insured losses of between $40 billion $60 billion, keep in mind that most consumers don't purchase flood insurance. The costs for uninsured homeowners to cover flood damage will be significantly higher.

Hartwig said it makes sense for the NFIP to raise rates to a level that are commensurate with the risk it assumes. And that doesn't just mean for the affected areas.

Ed Pasterick, a spokesman for the mitigation division of FEMA, said that no one can assume that they are safe from the path of a hurricane or catastrophic storm, making the risk of flood damage equal along the coastline from Alabama to Massachusetts. As a result, homeowners throughout the Eastern seaboard can expect rates to climb in the months ahead.

Katrina cheats lurking

Whenever a disaster like Hurricane Katrina strikes and brings widespread anguish to so many Americans, their fellow citizens rush to help.

Much of this aid comes in the form of money and most people funnel their contributions through legitimate charities. Unfortunately many of the unsuspecting are caught in the webs of unscrupulous scam artists and their contributions go to waste.

According to ScamBusters.org, here are some of the most common scams that arise after a disaster:

  • Phishing scams: In this scheme scamsters use fake Web sites that pretend to be legitimate relief organizations. If you click on the site and enter credit card or other financial information it will be used to steal your identity. Any contributions you make go into the pockets of the scammers.
  • Viruses and trojans: Spam is sent that includes photos of disaster areas or individual survivors, and these attachments contain computer viruses. These can enable hackers to take control of your computer and obtain information that they can use for identity theft
  • Fee-based spams: These are unsolicited e-mails that offer, for a fee, to locate missing relatives and loved ones caught in the hurricane

Much like the terrorist acts of September 11th, the county has once again seen massive destruction, this time by the forces of Mother Nature.  But once again, as it was in the fall of 2001, unscrupulous scammers are preying upon the victims.

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