Insurers' Losses from Hurricane Katrina May Lead to Steady Insurance Rates

As Hurricane Katrina's massive destruction reaches the Gulf Coast, insurers are facing the costs of the likely most expensive hurricane in U.S. history, prompting concerns about the future of insurance rates. In contrast, commercial insurance brokers like Chicago's Aon Corp. are poised to benefit financially from a potential stabilization of insurance rates. This could translate to increased profits for brokers, who charge commissions based on the premiums paid for insurance policies. Wall Street has already taken note, as Aon's stock price has risen 7% since Katrina struck.

Key Takeaways:

• The hurricane's massive losses may lead to a halt in rate cuts by insurers, potentially benefiting commercial insurance brokers like Aon Corp.
• The brokers' average stock prices have risen, with Aon's up 7%, Hub International Ltd.'s up 7%, and Arthur J. Gallagher & Co.'s up 2%.
• Hub CEO Martin Hughes believes that commercial insurance rates may stabilize or even rise in the aftermath of Katrina, rather than continue to decline as they have over the past year.
• Larger insurance brokers like Aon and Gallagher have reached multimillion-dollar settlements to resolve conflict-of-interest issues related to back-end commissions.
• Discounts on property insurance have led to a decline of 10-15% over the past year, while the prospect of stable insurance rates is encouraging investors.
• Insurers may raise rates by 15-30% for customers in hurricane-prone coastal areas to help restore their balance sheets, but this is expected to be limited to those regions.
• Investors are cautiously optimistic about the future of insurance rates, with analysts predicting steady or small increases rather than substantial hikes.

Statistics:

• Aon's stock price has risen 7% since Katrina struck the Gulf Coast on August 29.
• Hub International Ltd.'s stock price has increased 7% similarly.
• Arthur J. Gallagher & Co.'s stock price has climbed 2% as of Thursday.
• Commercial insurance rates have fallen 5-7% on average over the past year.
• Property insurance prices have dropped between 10% and 15% over the past year.
• Estimated total price tag for insurers from Katrina: $40 billion to $50 billion.

Sources:

• S. Daniels, "Aon's Stock Price Rises," Crain's Chicago Business, 2005
• M. Shields, "Report to Investors," Legg Mason Wood Walker Inc., September 6, 2005
• B. Ehrhart, "Insurer's Outlook on Rate Hikes," Interview, Crain's Chicago Business, 2005
• W. Blair & Co., "Insurance Industry Report," Chicago, 2005
• Aon Corp., "Reinsurance Brokerage," Chicago, 2005