Insurers are reducing the amount of coverage they provide to companies at risk from natural disasters after last year's record hurricane season caused $57.3 billion in insured damages.
The amount of natural-catastrophe insurance available to U.S. companies has declined by an average 15 percent to 20 percent from a year ago, said Aaron Davis, director of the national property practice at Aon Corp., the world's No. 2 insurance broker. The decline is more severe for companies with property in hurricane-prone areas, he said.
Hurricanes Katrina, Rita and Wilma, three storms that pummeled the Southeast last year, caused rating agencies to toughen their standards, forcing some insurers to limit their policy sales. Predictions of more frequent and expensive storms also helped drive up prices and shrink the amount of coverage available, Davis said.
American International Group Inc., the world's biggest insurer, and Zurich Financial Services AG had some of the biggest losses from last year's storms and decreased their potential payouts by as much as 25 percent this year. "The primary driver is profitability," said Chris Winans, a spokesman for AIG. "We have to protect the bottom line in the wake of major hits." Reinsurance, which insurers use to transfer some of their risk, is in short supply, further limiting what AIG can sell, Winans said.
"It's 40 percent light compared to the demand," Winans said.
"Many big companies are getting half the limit they purchased before, or less, and also experiencing triple-digit premium increases," said Robert Howe, head of the global property practice at Marsh & McLennan Cos., the largest insurance broker. "It's cutting across all of American business with catastrophe exposure."
Wal-Mart Stores Inc., the world's largest retailer, said in May that it would insure itself against hurricanes rather than pay higher rates.
Wal-Mart said in a statement that insurance policies offered this year were "substantially more limited and higher-priced." If Wal-Mart had been required to pay for its 2004 and 2005 hurricane claims, earnings per share would have been reduced by 2 cents and 4 cents, respectively, the company said.
Before Katrina, Omni Hotels Corp. had more than $100 million in storm insurance from AIG, Zurich Financial and other insurers to protect its 39 hotels in North America. That coverage has since dropped by 95 percent, said Mary Lynn Bangs, director of risk management at the company.
"If there's a substantial hurricane, I can't imagine our limit not being exhausted," she said.
Omni's two New Orleans hotels had $23.5 million in Katrina claims.
Insurers learned from Katrina that their forecasts underestimated the effect of "secondary-loss factors," such as blackouts, looting and other civil disturbances that can occur after a disaster, said Dan Loris of Zurich Financial.
New Orleans, a city of a half-million people, descended into chaos after Hurricane Katrina broke down a system of levees and the city was flooded. Thousands of people were evacuated.
Of Omni's two New Orleans hotels, the Royal Orleans in the French Quarter was relatively unscathed. It housed the local police precinct in the days after the storm and, later, government contractors, Bangs said.
The Royal Crescent in the central business district lost part of its roof and almost three full floors were destroyed by mold, he said.