Riot Damage Adds New Bills to Insurers' Existing Burdens
THE Los Angeles rioting is expected to have a broad negative impact on the property/casualty insurance industry in the United States. The riot losses - which are expected to be more than twice as high as the losses in the 1965 Watts riot in Los Angeles ($208 million in 1992 dollars) - come at an especially difficult time for property/casualty insurers.
The industry already faces substantial claims from a string of recent catastrophes, including a severe hailstorm that pummeled the Fort Worth, Texas, area last month; flooding in downtown Chicago; and terrorist bombings in London. Losses in the London bombings alone may exceed $1 billion. The Chicago flood is expected to lead to claims of well over $300 million. Now, the Los Angeles riot losses might be as high as $500 million, according to Business Insurance, a weekly magazine covering the insurance ind ustry published by Crain Communications Inc.
"We're seeing all kinds of figures bandied about on insurance losses, but we don't have a definitive estimate as yet," says Patricia Lombard, who heads the Los Angeles office of the Western Insurance Information Service. That organization is the West Coast arm of the Insurance Information Institute, the main trade group for property/casualty insurers.
Farmers Insurance, Ms. Lombard says, reckons that its riot losses will probably be in excess of $70 million; State Farm estimates losses between $30 million and $50 million; Allstate Insurance, around $20 million. Yet, as high as the numbers are, some perspective is needed, Lombard says. "Most of the damage involved loss to commercial property, rather than homes, apartment houses, or private property, such as automobiles." Noncommercial losses could have significantly boosted claims. And even the commerc ial losses remain well under the magnitude of claims stemming from recent natural disasters.
Hurricane Hugo, which smashed through South Carolina in 1989, triggered insurance losses of $4 billion; the earthquake that hit the San Francisco Bay Area that same year produced losses of $960 million.
Lombard also says reports that insurers are either raising or planning to raise rates in L.A. "are absolutely unfounded." But she acknowledges that some smaller companies, such as those in the reinsurance sector, may boost premiums. (Reinsurance companies help spread the risk of insurance underwritings.) Lombard does not expect any of the major insurance companies to vacate south-central Los Angeles.
Still, some urban shopkeepers around the US are bracing themselves for higher rates. "We're hearing reports that insurance rates may be going up here," says David Lee, secretary general of the Korean-American Association of Flushing, Queens, in New York. Flushing is home to over 70,000 Korean-Americans, and the second-largest Korean-American community in the US, behind Los Angeles. Many Korean shopkeepers, particularly newer immigrants, carry only liability insurance, rather than more-expensive property coverage, Mr. Lee says.
Rate increases may now be likely in some urban communities, where the danger of L.A.-style outbursts cannot be discounted, says David Seifer, who covers the industry for Donaldson, Lufkin & Jenrette Inc., an investment house. "This is a new risk situation, and there's got to be a revenue factor" to offset that risk, he says. Industry earnings have been declining, Mr. Seifer notes, due to the recession and a decline in the portfolio value of the mortgage and real estate assets the companies hold.
Still, the riots' "main impact on the insurance industry - and the US in general - may be more psychological than financial," says Lawrence Horan, a Prudential Securities Inc. economist.