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.
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.
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
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.
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
The three largest
domestic insurance companies -- State Farm, Allstate and Farmers --
hold some 70% of the property-damage insurance in the
But they have ceded a
very large part of their liability to global reinsurance companies
in England, Bermuda, Switzerland and France.
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
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
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.
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.
disasters, Mittler found, such charm has frequently been lost to
post-hurricane luxury development.
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
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
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
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
reforms, Lotane said, went hand in hand with new building codes
that also helped mitigate traditional property casualty risk in the
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
Lotane believes the
Florida solution will now serve as a model for Louisiana and
Mississippi, which currently lack state-funded programs to cover
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
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.
Hartwig said insurers
greatest concerns now are about how reconstruction will be carried
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
If that happens, it
means they will just be waiting for the next Katrina to create a
reporter Dan Luzadder, send e-mail to [email protected].