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Record Homeowners Insurance Claim Payments from 2005 Hurricanes

NEW YORK, January 5, 2006—The record total of homeowners insurance claims payments resulting from the 2005 hurricanes in Mississippi is enough to wipe out all homeowners premiums paid in the state during the past 17 years.

The magnitude of the loss will force a fundamental reassessment of risk in the state by insurance companies, according to the Insurance Information Institute (I.I.I.). This reassessment could lead to making homeowners insurance more costly and less available in Mississippi.

Homeowners insurers in Mississippi are expected to pay $5.5 billion in claims from Hurricanes Katrina and Rita, an amount equal to all homeowners insurance premiums paid in the state since 1989 and nearly nine times the estimated $625 million in homeowners premiums paid last year.

Homeowners insurance in Mississippi was generally unprofitable even before Katrina struck. In the 20 year period from 1985 through 2004, homeowners insurers sustained a net loss of $258 million, even after accounting for investment income earned.

Insurers will pay an estimated $5.475 billion on 355,000 claims to homeowners in Mississippi from Hurricane Katrina and $20 million on 5,000 homeowners claims from Hurricane Rita, according to ISO.

Overall insured catastrophe losses in 2005 exceeded $55 billion, a new record. The majority of those losses occurred in Louisiana and Mississippi. Hurricanes Katrina, Rita, Wilma and Dennis resulted in a total of approximately three million claims.

“After mega-catastrophes such as Hurricane Katrina, insurers and reinsurers will reassess the risk associated with writing homeowners insurance in Mississippi,” said Dr. Robert Hartwig, chief economist of the I.I.I. “This reassessment will be a multi-year process.”

“Clearly risk is heightened and premiums must rise to more accurately reflect that risk,” said Hartwig. “Some insurers may also limit the number of homes they are willing to insure in coastal areas until the reassessment process is complete. This would increase the number of home owners who will need to seek coverage through Mississippi’s beach and windstorm plan, the state’s insurer of last resort for coastally exposed properties.”

Hartwig explained that insurance rates in Mississippi are based on individual insurer experience in the state. “Profits from other types of insurance in other states—auto insurance in Illinois for example—cannot be used to subsidize hurricane-related losses in Mississippi,” he said.

Hartwig pointed out several factors that home insurers will be considering in their reassessment of risk in Mississippi. They include:

Predictions by meteorologists that hurricanes will be more frequent and more intense for the next 15 to 20 years.

Uncertainty surrounding the enactment of a new statewide building code, its enforcement and where homeowners will be allowed to be rebuild.

Lawsuits, such as those filed by Mississippi Attorney General Jim Hood and others that seek payments for flood damage under homeowners policies which contain long-standing and explicit exclusions for such losses also present a problem. Insurers are concerned that they could be held liable for billions of dollars in losses for which they have collected no premiums and have no reserves.

The Insurance Information Institute is a nonprofit, communications organization supported by the property/casualty insurance business.

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