Katrina's Impact on Insurance

Total insured losses from Hurricane Katrina could top $26 billion nationwide, and that leaves many wondering how those claims will translate to their own insurance premiums.

"I don't have nothing, I just have the shirt on my back," says one man who has faced losing everything in Biloxi, Mississippi.

Feelings of loss and despair have flooded the coastal areas hit hardest by Katrina.

Now insurance companies are expected to drastically raise their rates so they can offset billions of dollars in losses.

"If we see an effect, I think it will be minimal," says Chuck Krueger, Chair of the UW Executive Education and professor of finance.

Krueger says insurance companies tend to calculate rates on a state by state basis.

The only factor that may influence our rates is the reinsurance market.

"There will be a little bit of a ripple effect where local insurers will have to pay reinsurance premiums and or may be providing some of the reinsurance for those companies," says Krueger.

All insurance companies buy reinsurance, which is essentially insurance on insurance companies. And those markets tend to be worldwide.

"A 5% adjustment in Wisconsin because of the hurricane that might be reasonable," explains Dan Anderson, UW professor of risk management and insurance.

American Family is the leading writer of homeowners insurance policies in the state and they don't provide coverage in any of the hurricane prone states.

"I would expect maybe State Farm and Allstate, they may have more of a national adjustment than somebody like American Family in Wisconsin," says Anderson.

Krueger adds, "For the large companies that do a lot of writing there, they're going to have to compete in this local marketplace. So a company could in theory file for a large rate increase but the laws of economics will take over again and they won't have anyone buying that insurance."

In today's dollars, insured losses with Hurricane Andrew totaled $21 billion so it looks like Katrina will exceed that figure.

But for us in Wisconsin, the biggest impact will be on the price of energy and building supplies, not insurance premiums.

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