This Meteorological Term Will Cost Insurers Billions

Sandy may have been a slow-moving storm, but the damage estimates are piling up quickly. Just a couple of days ago, modeling firm Eqecat predicted losses of up to $20 billion; now, that upper level sits at $50 billion and is likely to go higher.

The amount for which property and casualty insurers will be liable will grow, too – and not just because total damage estimates are rising. The governors of New York, New Jersey, and Connecticut have announced that Sandy was not a hurricane, but a tropical storm, a classification that, even with the older damage estimates, will ramp up insurers' payouts into the $7 billion to $15 billion category.

Storm classifications make a difference for insurers and insured
As devastating hurricanes have become more frequent, P&C insurers have amended their policies to include higher deductibles -- often expressed as a percentage of the home's insured value -- for customers experiencing damages from those storms. This can be an unwelcome surprise to policyholders, who then must shoulder a greater portion of rebuilding costs.

Luckily for them, Sandy's classification was changed, just prior to landfall, from hurricane to post-tropical storm by the National Weather Service. This gave states leeway in declaring how claims would be handled. Maryland is also treating Sandy as a tropical storm, since state law requires an actual hurricane warning for the state in order for percentage deductibles to kick in.

Insurers may be wounded, but not mortally
Needless to say, major northeastern insurers like Allstate (NYSE: ALL  ) , Chubb (NYSE: CB  ) , and Travelers (NYSE: TRV  ) have seen their stock take a hit over the past few days; only Hartford Financial (NYSE: HIG  ) , inexplicably, has seen its share price rise. Allstate's CEO Tom Wilson has noted that while it's still too early to know the extent to which Sandy will hit the insurer's fourth-quarter earnings, it's unlikely that it will impact its overall financial stability.

Even with Sandy being heralded as second only to Katrina in economic costs, though, the insurance industry will not be put under water. Analysts note that, in the wake of any disaster causing widespread damage, investors worry. Stock price dips are not uncommon in these circumstances, and they should not be taken as dire signs.

Indeed, catastrophes often give insurers a prime reason to hike premiums and other product costs, which can give a boost to future earnings. Even as some say that number could be affected by more than 25% post-Sandy, others note that the industry's losses are limited by underwriting caps in storm-prone areas.

Insurers will take a hit from Sandy, just as homeowners in the storm's path have. But the firms are going into this with heftier cash cushions, after a formerly quiet 2012, and the knowledge that price increases will follow. For the long term, that sounds like a recipe for success.

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