Counting the costs

Hurricane's impact on insurance still a mystery

By Angelle Bergeron

Preliminary estimates indicate that insured losses from Hurricane Katrina are $34.4 billion, according to information compiled by the Hurricane Insurance Information Center, a service of the Insurance Information Institute.

Total economic losses are likely to amount to more than $100 billion, making it the most costly and devastating natural disaster in the nation's history. Hurricanes Katrina and Rita together produced a record 2.773 million claims, easily exceeding the 2 million received after the four 2004 Florida storms.

Still, industry experts say it's too early to tally the final damage and too early to guess how much the losses will affect insurance and bonding in the construction industry.

"If you were going to have a title for this article, it would certainly be, 'Who knows?'" said Billy Painter, an agent at Barksdale Bonding & Insurance of Jackson, Miss.

Indeed, with claims still being filed, and many still unpaid, the total impact is a mystery, much less the immediate and long-term effects in the region and the nation.

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"So much is unknown that it's hard to predict what will happen - positive, negative or whatever," Painter said. "We don't know what Congress will do and my understanding is that a lot of people have ceased working and are waiting on Congress."

Although there was an initial flurry of cleanup work on the Mississippi Gulf Coast, even that has settled down a bit, he said.

"No one knows now because Congress is sitting on their hands, and no one knows how much money they will get," Painter said.

Ken Simonson, an economist with Associated General Contractors of America, agrees that there are too many variables floating around to make educated assessments.

"We have not gotten much evidence yet," Simonson said. "I think the insurance companies are trying to figure out their exposure. There is also a huge question as to how much work will actually be done, how much reconstruction, and who is going to finance it and insure it."

The answers to those questions lead back to the federal government. In the New Orleans area, uncertainty about the levee system and other protective measures breeds uncertainty in insurers, Simonson said.

Federal support throughout the Gulf Coast will also affect the confidence of builders and investors, he added.

Immediately, what is known is that insurers will undoubtedly factor in the tremendous property losses when writing future policies and tabulating premiums.

"One major property owner I wrote a policy for got a 500% premium increase and his deductibles increased dramatically," Painter said. "If one gets an increase like that, it leads you to believe that others will get similar increases. We all represent the same carriers and it's all about how the carriers are affected and how their re-insurance is going to react to hurricanes and other events as well - tornadoes, earthquakes, everything. Remember, 9-11 affected insurance rates for contractors in Mississippi."

According to the HIIC, insurers cannot increase rates to make up for past losses but must base rates on projections of future losses in a given state.

However, the HIIC does predict that reinsurance, insurance purchased by insurance companies, will spill over into non-coastal areas. Furthermore, prices will increase nationwide if lawsuits succeed in retroactively rewriting insurance contracts to compel property insurance companies to pay the flood damage claims of people who did not buy flood insurance coverage from the National Flood Insurance Program.

"I think the biggest impact you're going to see is property insurance coverages along the coastal areas, including builders risk insurance (policies written during the construction period of projects)," said Bert Guiberteau with Cory Tucker & Larrowe in Baton Rouge, La. "We're already seeing changes in that along the coast, but how that coast is defined may change."

Typically, Interstate 10 has been the line of demarcation, with everything south being defined as the coast.

"Fewer markets are willing to underwrite below I-10, and they are doing so with increasing rates and higher wind deductibles from a named storm," Guiberteau said.

As far as what contractors can do to reduce their premiums, he doesn't know if there is anything that will lighten the premium load on anyone choosing to work south of I-10.

Guiberteau doesn't expect the storms to have significant impact on performance bonds. Sureties have some concern about how Katrina has affected contractors' cash flow, but many contractors are actually in better financial condition thanks to the reconstruction and cleanup. At least they are on paper.

"The issue is pay," Guiberteau said. "Everybody will get paid but slowly because there is a lot of bureaucracy."

The slow-moving federal contracts may ultimately force out smaller contractors, who may have been underinsured, are still waiting on their insurance payouts to regroup, and can't hold on until other financing becomes available.

"Insurance and re-insurance must be exhausted before a contractor can get to the FEMA insurance and they can only get that if their damage is a combination of flood and wind," said Derrell Cohoon, executive director of the Louisiana AGC.

Cohoon said he was working to drive down bid amounts of Corps of Engineers contracts to afford smaller contractors the opportunity to participate in some of the levee reconstruction. In many areas, owners are "poised to rebuild but can't even get power," Cohoon added.

Consequently, many contractors are in a holding pattern, hoping that debris removal and demolition contracts will sustain them until the dust settles.

"This has been and continues to be an adventure," Cohoon said. "We've got some great opportunities. If we can just hold ourselves together with what we are going through right now, the big construction boom will be awesome."

The rest of the country outside of storm-damaged areas is watching and waiting to see how it all shakes out, but thus far members haven't been "squawking" about expected, across-the-board increases, Simonson said.

Even nearby Arkansas has realized no increases in insurance and bonding rates, but will more likely be affected by increased materials, said Randy Irvin, vice president of Ramsey, Krug, Farrell and Lensing of Little Rock, Ark.

"Arkansas is not seeing an impact like (Mississippi and Louisiana) because many contractors stay more within state regions," he said. Irvin agrees that the incredible property losses will affect building and builders' risk insurance, but it's too soon to tell how much.

The real pain will come in the form of increased material and labor costs, Guiberteau said.

"Most contractors' limiting factors are people and equipment," he added. "There is just so much work that's available and so many manhours available within a period of time."