Why Home Insurance Rates Should Not Soar After Hurricane Irene

The good news regarding Hurricane Irene is that it did less damage than many forecasters initially suspected. The bad news is that it did a lot of damage, an estimated $12 billion to $13 billion.

Given such huge losses should the money you pay for homeowner’s insurance go up?

A firm “no” comes from Joanne Doroshow, executive director of the Center for Justice & Democracy.

“The damage from hurricanes is already modeled, planned for, and paid for by homeowners premiums,” said Doroshow, “and rates are not supposed to rise after these events.” In other words, insurance companies are supposed to understand risk, collect cash in advance, invest cautiously and have reserves available to pay off claims when something like hurricanes Katrina or Hugo come along.

Doroshow explained that “in the wake of Hurricane Andrew in 1992, insurers changed the way they set prices for hurricane coverage.In lieu of using the prior 20 to 40 years of recent history to set the prices by state, the industry adopted scientific modeling. These models project, by segment of the coastline called reaches (the anticipated storm damage for different category hurricane storms). The projections are for at least 10,000 years of virtual experience based on the best hydrological, meteorological, actuarial and other inputs available.

“This means,” said Doroshow, “that the 10,000 years of projected experience includes periods of many and very large hurricanes (like a category 5 storm making a direct hit on Miami and causing $200 billion of insured loss) and also periods where no hurricanes make land fall, like recent years.”

The bottom line is that insurance companies employ lots of actuaries and weather professionals to set their rates. Huge reserves should be in place. If company predictions preparations are wrong the result should be smaller dividends rather than higher premiums.

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