How Hurricanes Effect the Insurance Industry & How it Impacts You and Your Business

Hurricanes Helene and Milton have reaped record damage to the eastern seaboard this year. Major hurricanes will likely significantly affect insurance rates in both the regions directly impacted by the storms and possibly nationwide. While the immediate damage is localized, the financial and operational implications of hurricanes ripple across the insurance industry and affect premiums across the country. Here’s how:

Increased Reinsurance Costs: Insurance companies purchase reinsurance to protect themselves from catastrophic losses such as hurricanes. After such an event, reinsurers (who provide this backup insurance) face significant payouts, which can affect future reinsurance premiums. This will ultimately impact premiums for policyholders nationwide as carriers absorb increased reinsurance costs, even in areas not impacted by hurricanes.

Updating Risk Models: As hurricane data becomes more prevalent and accurate, insurers reevaluate their risk models. This can result in an increased forecast for future frequency and intensity of catastrophic loses. Insurers in turn update their models to reflect the heightened risk for storms. This can increase premium pricing, even in regions not subject to hurricane losses, so insurers can balance and absorb the losses from hurricane damage across their entire portfolio.

Rising Claims and Repair Costs: After hurricanes strike, the demand for building materials, labor and contractors spike. This dramatically drives up the cost of repairs and rebuilding. Higher costs means insurance carriers pay more to settle claims. This impacts the magnitude of the loss cost. Insurance to value calculations can be skewed and result in insureds having limits below replacement cost or trigger co-insurance penalties.

Insurer Reduced Competition: In high-risk areas such as Florida and the Gulf Coast, insurers may chose to reduce their exposure to these catastrophic events by withdrawing from a market or limiting coverage they offer in hurricane-prone regions. Due to supply and demand, remaining carriers typically increase premiums in those areas to offset the increased exposure. This can indirectly affect premiums country wide as carriers adjust pricing strategies to manage their overall risk portfolios.

Increased Demand on Catastrophe Funds: State and Federal funding may be depleted after a major hurricane(s). Replenishing those funds can require higher participation from carriers. If this becomes a necessity, insurance carriers many times adjust pricing in other territories to absorb their costs.

To recap, hurricanes primarily affect coastal areas, but the financial implications are felt nationwide. Those financial implications include higher reinsurance costs, updated risk modeling, increased number of claims, higher payouts on claims, reduced insurance carrier competition and many times premium increases for all of us well beyond hurricane affected regions.