A few weeks ago, I discussed how Hurricane Charley would not turn out to be the same as Hurricane Andrew: Insurance companies wouldn't go bankrupt; rates wouldn't get hiked to the ceiling; people's property and casualty claims would be honored.
There have been, as always, a few disputes and incidents, but the reports I've seen on the claims process have been remarkably positive. It helped that the insurance companies, having seen what damage could be inflicted when Andrew plowed through in 1992, charged premiums that adequately covered their risks, and the State of Florida stepped in to provide insurer of last resort coverage.
It also helped that the damage wrought by Charley, though massive at an estimated $7.4 billion in insured losses, wasn't nearly of the scale that the monstrous Andrew wrought. As I was writing the story, I wondered what would happen if another big insurance event happened in short order. We were still early in the hurricane season, after all. The insurance industry noted that it is confident as the "shock absorbers" it has in place weathered Charley. But bumpers, once they've been through an accident, must be replaced, as they lose their effectiveness. Another event similar to the first one could be much more costly.
Well, helloooooo, Frances.
Florida is about to feel the same thing that North Carolina felt in 1999 when Hurricane Dennis sat over the eastern half of the state for more than a week, saturating the ground, only to be followed 10 days later by a knockout punch: the brutal, massive Hurricane Floyd. (In fact, of the storms I've seen, Frances most resembles Floyd in size and power.)
Believe it or not, insurers are more than likely breathing a sigh of relief that this storm, like Charley, is hitting Florida. Insurers such as Allstate (NYSE:ALL), Chubb (NYSE:CB), Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and White Mountains (NYSE:WTM) have already endured payouts from Charley, and so even if their insured losses soar in Florida, they can tap into the Florida Hurricane Disaster Fund to cover some of their losses. Should Frances veer north and smack Georgia, the damages may be lower, but the insurance companies would not be able to tap the Florida-specific fund.
The insurers say they're ready and prepared. This may well be the case, though the hit to their capital structures caused by the dual storms is certainly unwelcome. This is, of course, what insurers are supposed to do, though. But just because the industry on the whole is prepared doesn't mean that every participant is. Just like the deflector shields on the Starship Enterprise, there's only so much financial beating they can take. The inability to pay by a weaker insurer or re-insurer might not constitute the same level of disaster that the large-scale bankruptcies from Andrew caused, but they would be disasters to those impacted nonetheless.
Even for the strongest property and casualty insurers, what Frances means is that their ability to handle still other megacatastrophes will be hampered, in spite of assistance from the Florida hurricane fund, which at the moment holds about $13 billion in reserve.
This is a big storm, very dangerous in Florida. It might be just as dangerous in the traditional home of the insurance industry, Hartford.
Bill Mann owns shares in White Mountains Insurance and Berkshire Hathaway.
