THE insurance industry now has another mess to deal with: Hurricane Iniki, which ravaged the Hawaiian island of Kauai this past weekend.
Hurricane Andrew's destruction in south Florida had already made 1992's losses the biggest ever for property/casualty firms.
The estimated $7.8 billion of insured damage from Andrew, plus Iniki's added costs, are not seen as an insurmountable blow to the industry, which has about $160 billion in capital against which to charge losses.
For large companies, the hurricanes mean a big cut in earnings and possible downgrading of their financial-strength ratings. For some smaller companies, the impact of Andrew will be worse.
"You're going to lose some companies," says John Snyder, senior vice president of property/casualty insurance with A. M. Best Company of Oldwick, N.J., a firm that monitors the financial health of the industry.
The failures - and Mr. Snyder predicts only a few - will be companies with policyholders concentrated in the affected region and with inadequate reinsurance protection, he says.
Some of the smaller companies that do survive will be running at half their former financial strength, Snyder adds.
It is too early to gauge Hurricane Iniki's insured damage; the total damage is now estimated at at least $1 billion.
Even before the hurricanes, this year had already seen riots in Los Angeles, flooding in Chicago, and damage from wind, hail, and tornados in the Midwest.
To disrupt the entire property/casualty industry, however, would take more than this, says Neil Doherty, a professor of insurance at the University of Pennsylvania's Wharton School in Philadelphia.
Professor Doherty, along with Wharton colleague Howard Kunreuther, modeled the impact on insurers of a $50 billion earthquake. That is how costly a repeat of the San Francisco quake of 1906 might be today, even with modern building codes.
The professors concluded that, of 20 companies they looked at, five would become insolvent. (The study was based on data provided by actual companies, large and small, with varying degrees of exposure to the San Francisco market.) When a company becomes insolvent, policyholders are protected generally by state guaranty associations, which bill the losses to healthy insurers in that state.
Also, insurance premiums would rise nationwide as a result of such a big earthquake, Doherty says. A second study he did, using historical evidence, found that investors would be slow to provide fresh capital to insurers.
This year's losses, though only a quarter the size of the hypothetical quake, may cause premiums to rise, Snyder says.
Pricing in the industry is very competitive, but fees for commercial insurance were due to rise even before the storms, Snyder says. The industry is on the "lean end" of its so-called underwriting cycle. Pricing changes tend to occur every few years as companies adjust to business conditions.
Prices of personal insurance (for homes and cars) are often subject to state regulation and so are less likely to rise, he says.
Last week, Florida's insurance commissioner froze the rates of one large insurer, American International Group, after a disclosure that the firm saw Andrew as "an opportunity" to raise rates.
"The rate schedule ... should not be adjusted as a knee-jerk reaction to one single disaster," comments Martin Weiss, president of Weiss Research in West Palm Beach, Fla., which rates life insurers. Pricing should be based on long-term risks, he says.
An added problem for many firms is that they have set aside too little in official reserves to cover ongoing costs of prior-year disasters. In June, Prudential Securities estimated the shortfall for 24 big companies at $17.4 billion - 12 percent of industry capital.