Many factors impede '07 insurance rate drops
By Michael Giusti • Bankrate.com

Even though 2006 is looking like one of the quietest years in decades for U.S. insurers, industry experts say any of a number of scenarios could trigger a dreaded blockbuster year with $100 million or more in claims.

In insurance terms, 2006 was tame. By midyear, consumers filed only $5.3 billion in claims -- a fraction of what was filed the year before. A record-breaking hurricane season, capped by super storms Katrina, Rita and Wilma, gave 2005 the distinction of being the costliest year on record for insurers, with $61.2 billion in claims.

But even that record year could pale in comparison to scenarios keeping insurance underwriters awake at night, and which are forcing insurance premiums to new heights in 2007 and beyond. 

Insurance companies take past experience into account when they price policies, but they also look at potential new threats. Those potential new threats could be substantial.

Topping the list of insurance nightmares is a major hurricane coming ashore along the New Jersey and New York coastlines.

According to estimates by the Insurance Information Institute, or III, a trade group based in New York, a Category 3 or 4 storm hitting the Jersey Shore just down the coast from Manhattan could rack up as much as $110 billion in insured losses, with another $90 billion in economic damage.

And while a major hurricane hasn't hit the New York coast for decades, meteorologists warn that the Atlantic basin is in the midst of a multidecade cycle of increased hurricane activity.

Taken as a trend, seven of the 10 most costly hurricanes on record, Katrina, Rita, Wilma, Charley, Ivan, Francis and Jeanne, all struck within a 14-month period between August 2004 and October 2005.

Numbers like that are enough to send most insurers seeking the protection of higher premiums and tougher underwriting standards.

It's no wonder then why rates for reinsurance, the policies purchased by insurance companies to protect them from catastrophic losses, have increased by as much as 300 percent in some areas.

"It's a supply and demand thing," says Michael Barry, spokesman for the III. Barry says there is a limited number of reinsurers willing to take on hefty risks, but plenty of demand, which pushes up the cost of insurance.

Even with a relatively claim-free 2006 hurricane season, Barry says insurance companies won't likely begin streaming back into exposed areas, such as South Florida and the Gulf Coast.

"These business issues are rarely made based on one calendar year," he says.

And, it's not just hurricanes that insurance companies worry about.

Insurance analysts say that with ever-increasing development along fault lines in California, it's just a matter of time before a $25 billion earthquake tears through the West Coast.

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