Customers find out they are uninsured against earthquakesNovember 30, 2011 6:00 AM
by Joan Tupponce
In May, Walker Sydnor wrote an editorial in his company newsletter urging the staff at Scott Insurance to talk with clients about perils such as earthquakes. He had no idea that three months later Virginia would be jolted by a 5.8-magnitude earthquake, the most forceful to hit the state in more than 100 years.
“People are shocked that an earthquake of that size could occur in Virginia,” says Sydnor, the president of the Lynchburg-based agency. “It’s easy to believe that this part of the country is far away from quake-prone areas, but the New Madrid [Missouri] earthquake in 1811 was so powerful that it briefly reversed the flow of the Mississippi and rang church bells in Boston.”
The Aug. 23 earthquake that shook communities from Georgia to Canada did the most damage at its epicenter in the tiny town of Mineral in Louisa County. The county suffered an estimated $80.6 million in damage to residential, public and commercial buildings. Unfortunately, most of the property owners were uninsured against earthquakes.
Like other many agents, Sydnor started fielding calls from customers immediately after the Virginia quake. “There are more conversations going on about earthquake insurance than there used to be,” he says. “It’s our job to be out there reminding people of events that are truly catastrophic. You can’t rely on the fact that it’s infrequent.”
Earthquake insurance averages about 2 to 3 percent of what a company pays for property insurance. Most earthquake policies have a high deductible for catastrophic coverage that can range from approximately 2 to 15 percent of the amount of insurance on the building, with minimum deductibles ranging from $25,000 to $50,000. “A lot of the damage we saw here would be under the amount of the deductible,” says Bob Hilb, CEO of The Hilb Group, an insurance brokerage based in Henrico County.
Another broker, Richmond-based Tabb, Brockenbrough & Ragland, actually handled a few claims from Fredericksburg businesses that suffered earthquake damage. Company President R.C. Moore suggests that businesses with masonry buildings buy earthquake insurance. “Particularly older masonry buildings,” he says. “They are not steel reinforced.”
Many businesses aren’t aware that standard insurance policies often do not cover earthquake damage. “I think it’s something everybody ought to think about,” says Richie Whitt, president and co-chief operating officer of Markel Corp., an Henrico-based specialty insurer that provides earthquake coverage. “If something happens and there is no coverage, you have to rely on your own resources to rebuild.”
The earthquake in Virginia was only one of many natural disasters that have occurred in 2011. Other events included the earthquake and tsunami in Japan, another earthquake in New Zealand, flooding in Australia, Hurricane Irene and a string of deadly tornadoes throughout the United States. Economic losses from disasters in the first six months of the year totaled $265 billion worldwide, according to Munich Re, an international reinsurance firm. (Insurers buy reinsurance coverage from other companies to lessen their risks.)
“It’s been a terrible year for the reinsurance industry,” Whitt says. “It absorbed a lot of losses in 2011 and reinsurers will be trying to increase rates in 2012.”
Reinsurance rates are a major factor in the direction of commercial insurance charges. “If the reinsurance companies’ rates go up, the rates we see as consumers will go up,” says Marshall Fleming, president and CEO of Bankers Insurance in Glen Allen.
No one in the insurance industry, however, has a clear crystal ball in determining whether commercial insurance rates for businesses will increase next year, says Fleming, but he adds something “has to give” soon. At the moment, insurance companies’ loss ratios run from the high 90s to over 120 percent. “For every $100 they take in, they are spending at least $98 in claims,” Fleming explains. “They have more claims than premiums.”
In the past, that payout has been offset by high investment returns and growth. “We don’t have that now,” Fleming says. Because of slow economic growth, the Federal Reserve has kept interest rates unusually low. As a result, the insurance industry has seen low rates of return on fixed-rate investments. (Normally, insurance companies invest in conservative vehicles such as bonds that carry lower returns than riskier investments like stocks.)
Like many others in the industry, Whitt believes insurance rates will be flat for a while, ending the downward spiral they have taken in the past seven years. “The market seems to have leveled off,” he says. “It’s stabilized.”
The catastrophic events of 2011 will factor into the 2012 market rates, but they won’t be the only factor. “The economy and general health of the businesses we service are as key to rates as natural events,” says Moore.
Many people in the insurance industry believe that businesses with catastrophe exposure, such as coastal properties prone to hurricanes and tropical storms, may see some increase in property insurance rates next year. The number of Virginia businesses in that category has grown since the insurance industry redefined its catastrophe zones using a computer modeling system. A zone that includes Norfolk, Virginia Beach and the Eastern Shore has been extended to the eastern part of the Richmond area.
Catastrophe zones are areas where hurricanes and tropical storms are likely to occur, based on computer models. “Those zones have moved further inland. It’s not just coastal areas any more. It’s a negative change for insurance buyers in that extended area,” says Sydnor. “It will affect capacity [the availability of coverage] and pricing of property insurance. Underwriting companies will limit how much exposure they have in catastrophe areas.”
He also predicts changes in casualty insurance, especially with workers’ compensation. Sydnor notes that workers’ comp has been underpriced for a good while. “There are two things in Virginia that are driving losses: increased frequency in lost-time claims and underlying medical inflation,” he says. “The medical component is more than 50 percent of all dollars paid for workers’ comp. We see a storm coming because of inflation in medical costs. Our advice to businesses is to have the right partners to help you beat that cost.”
Businesses also are encouraged to consider cyber liability coverage, insurance coverage against hacking and loss of customer information. “There is so much risk out there with [things like] cloud computing,” Whitt says. “Everybody has the exposure or risk whether they think they do or not. It should be part of a company’s risk management plan.”
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