Will Sandy Boost US Home Insurance Rates?

Will Superstorm Sandy bump up homeowners insurance rates across the country?

Not necessarily, according to industry experts.

"Rates are based on long-term trends, not one event," says Michael Barry, spokesman for the Insurance Information Institute. "Homeowners insurance is regulated at the state level, and any rate increases are based on actual and anticipated losses in any given state. Every line of insurance must stand on its own in every state."

Chris Hackett, director of personal lines policies for the Property Casualty Insurers Association of America, agrees. "One storm in and of itself may not be enough to convince them to increase rates" for everybody, he says.

Rates Could Rise First in Affected States

While that might be reassuring for homeowners in Austin, Texas, or Ogden, Utah, residents of the states hardest hit by the late October "hundred-year" storm that caused an estimated $10 billion to $20 billion in economic damage may be the first to feel its financial punch to their insurance rates.

"Generally speaking, you will see a higher impact on the East Coast because that's an easier message to deliver," predicts David Bresnahan, client manager for The Horton Group, an Illinois-based insurance brokerage. "It's more difficult to tell somebody in Illinois or Kansas they need to pay more because of Sandy."

Reinsurers Could Spread Their pain Around

Insurers will pass along a portion of Sandy's bill to their "reinsurers," companies that essentially take on some of an insurer's financial risk in exchange for a share of its premiums.

Lynne McChristian, Florida representative for the Insurance Information Institute, says those reinsurers will in turn likely make up their loss by raising their prices across the board.

"What happens in New York stays in New York with one caveat: reinsurance," she says. "Because reinsurance is priced on a global scale and ebbs and flows just like the capital markets, Sandy may have some impact on rates in general."

But Barry downplays the impact on consumers from any reinsurance hike. "It's conceivable, but when you look for the policy renewal on your homeowners insurance, I don't think it's something you should be overly concerned about, depending on the state," he says.

Storm's Timing Not Favorable for Consumers

Still, industry observers don't rule out Sandy's potential to raise homeowners insurance premiums nationwide, because of the storm's timing and its unusual point of impact.

The storm hit when insurers' "surplus" -- the piggy banks that property and casualty insurers use to pay catastrophic claims -- happen to be flush with cash, at a near-record $568 billion as of June 30, even after a relatively rough year for claims in 2011 from Hurricane Irene and other weather events.

Good news for homeowners, right? Not necessarily, according to Nat Pope, associate professor at Illinois State University's Katie School of Insurance and Financial Services.

Pope explains that the insurance industry runs in cycles. During a "hard market," such as what happened after Hurricane Katrina, insurers don't have much in reserve to pay out claims, so they tighten up underwriting standards and raise rates to avoid assuming more risk. During a "soft market," cash reserves overflow, underwriting standards loosen up to attract customers, and competition drives premium rates down.

"Right now, we have been in a soft market for a period of time, and the industry is hoping for it to get harder, which would mean they could raise their rates," says Pope. "While losses like Sandy aren't a good thing, the upside is they'll begin to get higher rates out of their customers."

But to do that, Pope says the industry will need a "market mover," one insurer who breaks from the pack and starts the move toward tighter underwriting and higher prices.

Location, Location, Location

That's where Sandy's location comes into play. According to the research firm SNL Financial, the top three insurers in hard-hit New Jersey, New York, Delaware, Maryland, Pennsylvania and the District of Columbia by market share are State Farm (13 percent), Allstate (11 percent) and Travelers (10 percent). Pope says that may make State Farm just such a market mover.

"State Farm is heavily exposed in the state of New York, so they're going to get hit pretty hard by Sandy," says Pope. "If anyone is inclined to increase their rates to recoup their losses, State Farm might be in a position to do that."

A State Farm spokesman did not immediately respond to messages seeking comment.

But Pope adds that whatever homeowners insurance rate increases may follow will not land unduly on those with property damaged by Sandy.

"It's a public misconception that the insurance company is going to come back and target somebody who files a claim. That's not really how it works," he says. "What might happen instead is the insurance company may reclassify a region as a higher-risk area, and any place that is considered to possess the same underwriting characteristics, whether it be Maryland or Virginia or Massachusetts, would be subject to that same general rate pattern."