Insurance companies are likely to end 2011 in the black, despite a string of weather disasters. But insurance companies are expected to raise premiums..
The $7 billion in estimated losses from Hurricane Irene will compound the vast damage caused by weather in the United States this year. Yet despite billions they've paid out for floods, tornadoes and earthquakes, big insurance companies can expect another profitable year.
And their customers can expect higher premiums.
The stocks of major insurers shot up on Monday as investors celebrated Irene's less-than-expected damage. The storm didn't even cause most analysts to adjust their profit estimates for insurers.
In part, that's because insurance companies have been raising premiums this year, especially for customers in high-risk areas. Homeowner and auto policies cost 5 to 10 percent more than they did a year ago, according to research by Gregory Locraft, an analyst with Morgan Stanley.
The damage from Irene and other disasters means that property insurance premiums will likely rise across the board into 2012, Locraft said.
"Irene is just another log on the fire," he said.
The storm seems unlikely to hurt the overall U.S. economy. Analysts agree that damage from Irene will likely run less than $10 billion — a tiny fraction of the $14 trillion U.S. economy.
Reconstruction might even strengthen areas hit hard by Irene, analysts said. Rebuilding homes, repairing cars and fixing streets and bridges should help boost those local economies late this year and early next year, they said.
Irene is the 10th U.S. weather disaster this year to have caused more than $1 billion in damage, the National Weather Service says — the most for any year on record dating back 30 years. And 2011 is hardly over.
Excluding Irene, this year's natural catastrophes had caused about $18 billion in damage to insured properties, according to the Insurance Information Institute. Irene will add $3 billion to $5 billion, said Robert Hartwig, an economist and president of the group.
In a normal year, industry losses typically total $15 billion to $20 billion, said Robert Litan, an industry expert and senior fellow at the Brookings Institution, a Washington think tank. And the peak hurricane season is only about half over.
Another reason insurers are expected to raise premiums is that reinsurance companies are set to boost their rates Jan 1. Reinsurance is coverage that insurance companies buy to cover their potential losses from catastrophes.
This year, reinsurance hasn't offset insurance companies' costs. Reinsurance policies don't kick in until a single disaster's costs to insurers top $10 billion. When the billions are spread over numerous disasters, as has happened this year, insurers — and their customers — must absorb the costs.
That won't stop reinsurance companies from hiking their rates — costs that will be passed on to homeowners.
Insurance companies that cover major disasters are typically able to absorb heavy costs. They manage investment portfolios that produce relatively stable income. Most of their policies never result in claims. In such cases, the premiums are pure profit.
And when a string of catastrophes hits, as in 2011, they can raise the premiums they charge homeowners.
Even with higher premiums, finding coverage will become harder for people in areas where insurers are sensitive to risks from catastrophes. Few insurers, for example, will cover homes on fault lines or near the Gulf Coast, said Robert Rusbuldt, CEO of the Independent Insurance Agents and Brokers of America.
"When it comes to property insurance, it's all about location," Rusbuldt said.