Will insurance issues define the rebirth of the Gulf Coast?

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Even as rescue teams continued to pluck survivors from flooded buildings and rooftops in New Orleans two weeks ago, an army of insurance adjusters and civil engineers were gathering at the edges of the disaster area to begin assessing the economic toll.

Beyond the human catastrophe of Hurricane Katrina, New Orleans -- the engine of the Gulf Coasts tourism economy -- faces a less visible but equally challenging crisis: An insurance and financial disaster that will have a profound impact on how and when the city is rebuilt. 

Natural disasters, when they are this large, become a form of social reengineering, said Elliott Mittler, a California-based consultant to the federal government and others.

Mittler, who has spent years identifying the political, economic and social impacts of natural isasters, is the author of numerous case studies on public safety, financial and political responses to Hurricane Andrew in 1992. He predicts that the insurance crisis that followed Andrew in Florida and Louisiana is likely to play out again now in New Orleans and along the Gulf Coast.

Tough decisions ahead

It may take years for the political, economic and social change that Katrina has wrought to become fully evident. But in the short term, insurance carriers will begin making tough decisions about continued coverage -- decisions that will dictate many of the parameters of reconstruction.

Insurance companies have done a decent job of backing away from anything they can back away from, Mittler said. They did that throughout the 1990s, between hurricane Hugo and the California earthquakes, when there were so many large disasters that insurance companies re-evaluated what, and how, they would cover.

Greatly complicating these questions is the fact that insurance is a multilayered industry consisting of primary insurers, reinsurers and regulatory agencies, with no one layer able to determine levels of indemnification independently.

The three largest domestic insurance companies -- State Farm, Allstate and Farmers -- hold some 70% of the property-damage insurance in the U.S.

But they have ceded a very large part of their liability to global reinsurance companies in England, Bermuda, Switzerland and France.

First estimates: $25B in losses

Early estimates of insured losses from Katrina top $25 billion, with most of the direct loss borne by international reinsurers. But industry experts also estimate that up to half of the properties may be uninsured, and with the regional economy in tatters, the true cost of the storm may never be known.

From a tourism standpoint, the looming question is what kind of destination a rebuilt New Orleans might be. The answer to that will depend largely on what risk insurance companies are willing to embrace in a city that would have to be rebuilt below sea level if hundreds of historical buildings were to be restored.

Robert Hartwig, chief economist for the Insurance Information Institute in New York, an industry group, said Katrinas destruction will have a profound impact on future insurability of storm risk in the area, which in turn will likely affect the availability of investment from capital markets for rebuilding New Orleans.

This is going to be the second most expensive -- if not the most expensive -- natural disaster, in terms of insured losses, in U.S. history, and that in itself is significant, Hartwig said. But there are also expectations that there will be more events like this in the future, which means that there is likely to be a continued trend toward higher rates or loss of available insurance for insuring coastal areas.

Insurance company officials, who spoke on condition of anonymity, said major insurers have already begun meeting to discuss how to respond to the disaster. Hartwig said reassessment by insurance companies of their role in covering disasters in New Orleans and the Gulf Coast is inevitable.

There is likely to be restructuring of some insurers and rebalancing of their risk in the wake of these events, he said. That wouldnt be unusual, and its a prudent move on the part of insurers.

Over the long term, however, he said the availability of coverage for rebuilding would be determined by how regulatory authorities react.

Will they allow rates to increase to cover the risk that companies are assuming? Hartwig asked. If the answer is no, the availability of insurance will certainly be affected.

A social reconstruction

With thousands of buildings beyond repair as a result of winds and floodwaters rising through breached levees, much of the early reconstruction will be limited to bulldozers leveling properties.

While that is happening, a less visible social restructuring will be taking place. Mittler said with uninsured losses in the region expected to equal the insured losses, thousands of property owners will find they are unable to rebuild.

Wealthy people will figure out how to accumulate land and do developments they could not do in New Orleans in the past, Mittler predicted. People who didnt carry enough insurance will be forced out or will forfeit their mortgages and will be forced to move.

In addition to displaced people and property at lower socio-economic levels, another victim of the rebuilding effort may well be the sometimes fragile architecture and artifacts that have made the city a destination of unusual historical charm.

Following other disasters, Mittler found, such charm has frequently been lost to post-hurricane luxury development.

A major political issue

What does seem likely, many observers say, is that the willingness and even the ability of insurers to indemnify life and commerce in a city that remains below sea level is going to become a major political issue.

Louisiana rejected major insurance reform efforts following Andrew in 1992, Mittler noted. Florida, in contrast, enacted a set of new insurance regulations that allowed business and property owners to continue to buy wind and storm risk insurance through tax-funded insurance programs.

Why Louisiana rejected the opportunity is probably a study in the states arcane political system, Mittler said.

Decisions in Florida to create state-backed insurance funds for high-risk areas were heavily lobbied by major insurance industry companies, which simultaneously threatened to withdraw essential storm-loss coverage in the wake of the devastation wreaked by Andrew.

Bob Lotane, a spokesman for Floridas Financial Services Division, which regulates insurance in the state, said Florida formed two reinsurance programs to provide storm coverage after Andrew.

The problem after Andrew was that insurance became very expensive and very hard to find at all, Lotane said. We started [state reinsurance funds] so we would not be at the total whim of international reinsurance companies.

After a political fight in which insurance companies spent millions of dollars to lobby for state-guaranteed risk against catastrophic losses in coastal areas, the state insurance programs now insure thousands of property owners. This, in turn, has set the stage for huge investments in high-dollar developments in areas at high risk.

The insurance reforms, Lotane said, went hand in hand with new building codes that also helped mitigate traditional property casualty risk in the state

Since the law requires that the state-funded policies must be cheaper than the same insurance provided by private carriers, the state would never be competing for business with private carriers, Lotane said. Its still expensive, but it at least it has allowed property owners to find insurance.

The Florida solution

Lotane believes the Florida solution will now serve as a model for Louisiana and Mississippi, which currently lack state-funded programs to cover catastrophic losses. 

Redevelopment of high-dollar properties in storm-prone coastal areas remains controversial because repeated devastation damage seems likely. Without state insurance and reinsurance guarantees, Mittler said, that redevelopment would not have occurred in Florida.

Look at the south coast of Florida and you see that in the wake of Andrew, shacks and beach houses on the coast have been replaced by expensive homes and commercial properties, Mittler said. You will see the same thing in New Orleans.

The desirability of such development is in the eye of the beholder, he says.

Depending on your perspective, the attractive coastal areas will get better, Mittler said. Ten years from now, whatever travel and recreation there was in New Orleans will increase dramatically because people who have money will buy the land and will put up hotels and tourist venues, and so what you will see is a shift in who owns what.

In the first week after the evacuation of New Orleans, insurance company officials and Louisiana insurance regulators who work with them told TravelWeekly.com that insurance reform in Louisiana -- along with the resolve of state, federal and local officials to rebuild a more flood-resistant city -- will dictate how New Orleans is resurrected and how strong its future financial foundation will be.

Looking ahead

Hartwig said insurers greatest concerns now are about how reconstruction will be carried out.

If the past is any guide, (the losses) will have almost no impact on the demand for these coastal properties, he said. In Florida, in the wake of $23 billion in losses from four storms this past year, there has been no perceptible impact on the real estate market there or the desire to build hotels or condos. Instead, there has been a 15% annual increase in the investments there.

Mittler and others who are looking beyond the initial efforts to get the city operating again say that opportunistic investment in devastated portions of New Orleans is almost a given.

That, in turn, will have a profound impact on the very character that has always made New Orleans a unique destination among U.S cities.

But that might be inevitable, because a fundamental change will be required to make the area insurable.

I have every confidence that New Orleans will be rebuilt, but it may be a much different city, Hartwig said. Either the lessons learned from Katrina will be taken to heart -- and New Orleans becomes an example of how a city in harms ways needs to be rebuilt -- or it will be rebuilt as quickly as possible, without regard to strengthening building codes and imposing wiser land-use policies.

If that happens, it means they will just be waiting for the next Katrina to create a new tragedy.

To contact reporter Dan Luzadder, send e-mail to [email protected].

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