Transcripts

Hurricane Season Is Bringing A Storm Of Headaches For Insurance Companies & Home Owners

SUSIE GHARIB: Thursday is the start of the 2006 hurricane season, and after two years of major storm activity, many Americans are concerned about what this season could bring. The insurance industry is also concerned, so it is changing the way it calculates the risks of insuring for hurricane damage. As Jeff Yastine explains, those changes are causing big headaches for some homeowners.

JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Some things have changed in the nine months since hurricane Katrina struck the Gulf coast. The U.S. Army Corps of Engineers rebuilt the New Orleans levee system at a cost of $800 million. Still, thousands of people throughout the four-state area remain out of their heavily damaged homes. For the rest of the Gulf and Atlantic coasts, something else has changed: how U.S insurance companies assess hurricane risks. For decades, insurers have used historical data of past hurricanes to show where they hit and how often. This year, they`ve switched to a new model, using teams of climate experts, and their analysis of what the next five years is likely to bring in terms of future hurricane activity. Insurers say the switch is necessary to adjust for fast-changing climate conditions.

THOMAS WILSON, PRESIDENT & COO, ALLSTATE: Clearly the environment is much different today than it was even 10 years ago Jeff. The water is warmer and the wind shear is different, so that means there will be more hurricanes, and those that happen will be stronger. So the whole industry has been reassessing how we deal with these catastrophes. We`ve been doing that at Allstate and we`re seeing many other companies do it as well.

YASTINE: That reassessment has come at a big cost. In some coastal Florida counties, homeowners are seeing premiums jump by more than 100 percent. Thousands more homeowners in Florida, Texas, even as far north as Long Island and coastal New England have seen their policies canceled altogether, based on these new hurricane risk models. The change alarms consumer activists, who say it subjects risk analysis to too much expert opinion on future conditions.

J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER FEDERATION OF AMERICA: They`re now saying, all right, we`re not going to use science anymore. We`re going to use a bunch of experts. And we`re not going to use 10,000 years of future projection. We`re going to use five years. And right now it`s a very high period, so we`re going to have to raise the rates again. It`s going away from science to a sort of kind of parochial guesswork, and I don`t think it`s right.

YASTINE: Guesswork or not, the risk assessment change is putting the heat on insurance commissioners in coastal states. They must balance homeowners` concerns about rising insurance rates against insurance companies that say they need those higher rates to take on new, higher hurricane risks. Jeff Yastine NIGHTLY BUSINESS REPORT, Miami.