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Definition
In the past 20 years, hurricanes have had a more devastating impact on the insurance industry than in the entire history. This fact made the industry players more sensitive towards the catastrophes, especially when determining the insurance policies to offer. According to insurance definition, hurricanes form in the oceans, and both the winds and floods move towards the mainland causing great damages to properties in urban and rural areas. Hurricanes can affect any state regardless of the location. In the United States, however, several regions have been identified to be more prone to this natural catastrophe. Indeed, today, the main challenge is the flooding caused by coastal hazards, such as hurricanes that become more frequent and severe, creating unexpected threat to the coastal regions and the Midwestern states. In fact, in those areas, hurricanes have historically taken place once in every 20 years, but now, they are expected to occur every four or five years. The situation has become a major concern of insurers because more than a half of the American citizens live in the coastal regions, and about a half of the nations GDP is produced in the Gulf and Atlantic coastal regions.
According to estimates given by Pasich, Fleishman and Paar, losses caused by flood along the Atlantic and Gulf coastlines will increase by 80 percent with a half meter rise in sea level by 2030 (1-3). About 210 hurricanes have occurred in the eastern US in the last 100 years, reflecting a mean frequency of 2.1 land-falling hurricanes annually. The relative dearth level because of hurricane occurrences and the complexities resulting from rapidly changing demographics are the major reasons that insurers have used simulation models to accurately forecast hurricane losses. The hurricane season starts in June and lasts until November or early December. In most cases, many insurance firms will not accept any new application after an allocated hurricane enters the Gulf of Mexico and, in particular, the area located in the borders of 20 degrees north latitude by 80 degrees west longitude.
Insurance coverage
Insurance for losses caused by hurricanes can be offered under a number of different kinds of insurance policies. The insurance coverage is provided under a property policy as well as other laws including home-owners, comprehensive and renters ones (Tutwiler 2). Many of these property insurance policies cover damages of real properties caused by the disaster. Due to the breadth of coverage given by an all risk policy, when an insured states that he/she has suffered a loss from a disaster, the burden of evidence shifts to the insurance carrier to demonstrate that the damage is not paid back. Property insurance policies generally cover all the structure that are mentioned and scheduled in the policy.
The property insurance policies are also responsible for insuring personal property. In most cases, this coverage is offered under a personal property provision that is not classified. The provision usually offers coverage for personal property not listed that is typical or secondary to the occupancy of the structure or utilized by the insured in the particular structure. Certain types of property, especially those that can be moved easily, are covered only under floater endorsements to the larger policy. The endorsements or policies are used for business personal staff, such as furniture, stock, machines, at least to the level where the properties are within the insured sites.
Typically, property policies consist of provisions that are paid for preventive efforts put by the insured to avoid damages as well as those that might require such efforts. The provisions are known as sue and labor ones. Essentially, these provisions apply only if the insured spends some money to protect the covered premises from destruction or damage resulted from a hurricane. The purpose of the provision is to encourage the insured to engage in protecting the threatened property so as to avoid unnecessary expenses to the insuring company caused by a greater damage to the covered item. The policy normally applies, for instance, when an insured reinforces its roof to avoid damage.
In insuring disasters like hurricanes, many home-owners and renters policies offer coverage for another expense called additional living expenses. This kind of policy is defined as any essential increase in living expenses an insured incurs so that the family can continue living under the normal standards. The coverage for home-owners policies is usually offered in the shortest period required to replace the damaged property or to relocate. This coverage has not only a time limit, but also a financial limit.
In addition to the policies mentioned above, property insurance policies relating to hurricanes also provide coverage in business interruption. This kind of insurance protects against the several kinds of economic damages. The damages are defined in the following manner. The insurance covers physical properties of the business as well as the consequences related to business operations. The coverage includes contingent business interruption, gross earnings, profit and commission, extra expense and civil authority coverage. Generally, the business interruption coverage involves the expenses that an insured incurs in reopening a business for a certain period.
Property policies exclude only damages caused by floods (Wall 7). In such cases which extend coverage to damages caused by wind, the usual flood exclusion which is presently in use alleges to exclude damage resulting from or caused by wind. Such kind of exclusion that is probably brought to a court as a result of damages suffered by the insured following a hurricane has been the bases of many controversies. The more the insurer policies fail to include flood damages which are directly related to hurricane cases, the more litigations have been put in place in regard to insurance claims.
Issues regarding coverage
Most policies dealing with property insurance offer coverage for damages resulting from hurricanes, apart from flood damage caused by the disaster (Mills 67). As a matter of fact, flood coverage cannot be fully covered with the general property insurance policies though if an insured has a flood insurance policy, then he/she will get a coverage in case of flood damages. Many insurance firms as well as the federal government which is to follow the National Flood Insurance Program are responsible for paying the coverage back. The program includes the insurance premiums and covers the claims and losses. Some property insurance policies, however, offer restricted coverage in case of hurricanes or demand a greater deductible to be bought specifically for the hurricane hazard. Most states that are vulnerable to hurricanes have government controlled insurance programs that offer hurricane coverage to individuals who cannot get insurance via the voluntary market.
The consequences of Hurricane Katrina resulted in large debts in National Flood Insurance Program (NFIP) and its continued reliance on taxpayer support. According to insurance brokers estimation, the hurricane could cost world insurance and reinsurance sectors about US$40 billion (Buckley 1). Other government studies claimed that NFIP was not actuarially sound. The program could not collect enough premium income to create reserves to respond to long-term anticipated future flood losses. This was in part because the US Congress authorized sponsored insurance rates for certain properties. The catastrophic hurricane which had induced flood occurrence in 2005 required large loans from the US Treasury to pay claims. Another concern was that properties that had suffered repeated flooding and were still to be paid caused a great drain on NFIP resources (Linnerooth-Bayer and Mechler 4).
Hurricane Katrina also raised the major issues for private insurers. For instance, in Florida, the hurricane inflicted the largest US catastrophe loss and resulted in chief insurance insolvencies. Florida insurance markets financial strength had already been affected by the withdrawal of some national insurers (partly due to regulations requiring insurers to provide the same premiums to most vulnerable coastal regions and low-risk mainland properties) that were replaced by government-sponsored entities and weakly-capitalized insurers. For example, the second biggest insurance company in Florida, the Poe Financial Group which insures homes, apartments and condos, declared insolvency in 2006. Indeed, this was the biggest bankruptcy the Florida state had ever overseen. The state-sponsored insurers were to bear the outstanding claims. This case shows that even strongly capitalized and diversified insurance firms faced insolvency as a result of hurricane Katrina.
Hurricane Katrina uncovered the lingering dissatisfaction with the state sponsored programs and private insure procedures, particularly pertaining to definition between flood coverage and wind damages. Since NFIP does not offer wind damage insurance, it has been argued that the US should establish a nationwide all-hazards policy. Hurricane Katrina also showed a principal problem in communication and information in regard to NFIP and private insurers policies. Many complainants were surprised to find restricted coverage, which prompted some to argue that there was a need to increase the maximum insurance limits substantially (Griffin 3). Mills observed that the limitation of insurance was often criticized, but in some situations, it could also be seen as an sign that society was restricted in its capacity to pay the skyrocketing costs of hurricanes (1042).
Conclusion
In respect to insurance standards, hurricanes are natural disasters caused by weather changes in the ocean which are characterized by very strong winds and floods in some cases. Although the coastal regions of the United States are the most vulnerable to this hazard, its impacts can extend to the mainland as well. There is an increasing trend in the frequency of the hurricanes occurrence within the last twenty years, reporting on the highest level of this natural catastrophe in history. Hurricanes mostly occur between June and November. The insurance loss caused by hurricanes is mainly covered under the property policy though there are other relevant policies, such as home-owners and renters policies. Damages caused by floods are not covered under the general property policy as the federal government alone bears the risk through NFIP which includes the premiums to insured as well as pays the claims and losses. This is the major reason for hurricane Katrinas controversy when NFIP could not collect enough premium income to create reserves to respond to long-term anticipated future flood losses though most of the insurance firms had experienced insolvencies as a result of previous hurricanes in the past.
Works Cited
Buckley, Patrick et al. The Insurance Industrys Troubling Response to Hurricane Katrina. 2006. Web.
Griffin, D. L. Testimony Before the US Senate Banking, Housing and Urban Affairs Committee Concerning the National Flood Insurance program on Behalf of the property Casualty Insurers Association of America. Washington DC: Congressional Record, 2007. Print.
Linnerooth-Bayer, Joanne and Reinhard Mechler. Federal Emergency Management Agency Challenges Facing the National Flood Insurance Program. 2005. Web.
Mills, Evan. Insurance in a Climate of Change. Science 309(2005): 1040-1044. Print.
Mills, Evan. From Risk to Opportunity: Insurer Responses to Climate Change. Boston, MA: Ceres, 2007. Print.
Pasich, Kirk, Fleishman, Barry and Randy Paar. A Guide to Insurance Coverage for Losses from Hurricane Katrina. 2005. PDF file. Web.
Tutwiler, Charles. Property Insurance Law and Ordinance Coverage-Illusionary. n.d. PDF file. Web.
Wall, Dennis. Flood Exclusions, Hurricanes and Theories of Insurance Coverage. Property Insurance Law Committee Newsletter 2005: 7-10. Web.
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