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Cheap Insurance for Homeowners Could Suffer from the Advance of Hurricane Irene

If Hurricane Irene strikes the southeast United States the weekend of August 26 as expected, the event could be exactly what the insurance industry wants. While insurers won’t like paying out settlements, they will like having a valid excuse to raise rates after three years with no significant storm activity. Irene is predicted to graze east Florida, potentially making landfall in the Carolinas (with a margin of error of about 250 miles). Currently the strengthening hurricane is threatening the Turks and Caicos, the Bahamas, and Puerto Rico. It’s also threatening the cheap insurance rates of everyone living in its path.

Premium Increases are Tied to Major Storm Events

Because no hurricane has hit the U.S. in almost three years — since Hurricane Ike in 2008 — this storm could trigger premium increases across-the-board for the different genres of applicable insurance in storm endangered areas, primarily the American Gulf Coast and Eastern seaboard. Insurance industry losses for 2011 are already in the neighborhood of $90 billion, which is 20 percent more than 2009 and 2010 combined. If insurers see a way to start trying to make that up, they will.

In purely financial terms, the inter-relation makes sense. Insurers are in the business of gambling on risk. When something happens they can’t stop — like a hurricane — and they’re forced to pay out in damages, the companies start looking for ways to get that money back. Unfortunately, this often translates to claim rejection. After Hurricane Katrina, many homeowners were denied settlements. Basically if you had hurricane insurance but no flood coverage, flooding destroyed your home and vice versa. A little less nefarious way to recoup expenses is to pass the amount back out to consumers in the form of a rate increase.

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How Bad Does the Storm Have to Be?

Hurricane Irene would have to cause as much as $15 billion in damage to trigger rate increases. Even if that does not happen with this storm, however, the season is only a third over and it shows every sign of being an unusually active one. Cumulative expenses for the industry are just as likely to raise rates as a single event, although this storm is aimed at a highly vulnerable area. In the Carolinas, the population on the coast doubled between 1960 and 2008. The high population density sets the stage for major property loss in the event of high storm damage.

The insurance industry is closely watching the situation, with the North Carolina Insurance Underwriting Association saying the issuance of new policies would likely be suspended over the next two days. Additionally, restrictions might also be imposed on existing coverage. Given the fact that many residents of the Gulf Coast who were hit hard by Hurricane Katrina have yet to sort out their insurance woes six years after the fact, all parties are justified in eyeing the approach of Irene with wary caution — and for consumers, what’s likely to disappear in the aftermath of this storm or its brethren is the cheap insurance their budgets so badly need.

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