Allstate Faces Worst Year for Catastrophic Losses After Hurricane Katrina

Strategic Insights -

Hurricanes Katrina and Rita are not alone in causing devastation. Hurricane Ophelia and Dennis were the opening acts, and Hurricane Wilma may be the final blow for The Allstate Corp. The insurance company, the Northbrook-based insurer, and most of the rest of the insurance industry badly misjudged their risks, leading Allstate's Chief Executive Officer Edward Liddy to announce plans to cutback on insuring homes in Gulf Coast states. The company's $1.55 billion quarterly loss and warning that total hurricane-related losses will top $3 billion, exceeding the cost of Hurricane Andrew in 1992 by a third, are a clear indication that the industry needs to rethink its approach to risk assessment.

Key Takeaways:

  • Allstate will cutback on insuring homes in Gulf Coast states due to badly misjudged risks, according to CEO Edward Liddy.
  • The total insurance industry bill for Katrina could top $34 billion, according to industry statistics released earlier this month.
  • Allstate denied that home insurance premiums in Illinois will be affected but executives acknowledged it may change the way it estimates all risk from catastrophic events.
  • Insurance consulting firm Advisen Ltd. found that new policies are becoming more expensive, with some as much as 20 percent higher, due to increased costs levied by re-insurers and commercial insurers.
  • The catastrophic insurance portion of premiums is up because insurers fear the effects of even low-level risks, according to Advisen Ltd.
  • Allstate has to change something to mitigate its losses, and risk assessment might be the easiest option, analysts said Thursday.
  • The company dropped 95,000 customers, bought reinsurance for others, increased premiums by 9 percent, and declined to take any new customers since last year's hurricanes.
  • The hurricane season caught the industry by surprise, and insurers admit they have to re-think basic assumptions about risk assessment.

Statistics:

  • $3 billion: The total hurricane-related losses that Allstate warned will exceed the cost of Hurricane Andrew in 1992 by a third.
  • $1.55 billion: Allstate's quarterly loss, a record high.
  • $34 billion: The estimated total insurance industry bill for Katrina.
  • 20%: The increase in new policies premiums, according to Advisen Ltd.
  • 95,000: The number of customers Allstate dropped after last year's hurricanes.
  • 9%: The increase in premiums since last year's hurricanes.

Sources:

  • Daily Herald news services
  • Advisen Ltd. (insurance consulting firm)
  • Allstate Corporation
  • Roosevelt University (professor Steve Tippins)