Hurricane Sandy a Double-Whammy for Households

Hurricane Sandy a Double-Whammy for Households
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Even those U.S. households which aren't directly affected by Hurricane Sandy could face an unwelcome rise in their insurance premiums in the wake of this massive, drenching storm.

The cost of homeowners' insurance has already been on the climb – a factor which, along with higher food and fuel prices, has pushed up the cost of living for the typical American family in recent years even as income growth remains stubbornly weak. The average homeowners' premium has risen by 97% since 2000 – a virtual doubling – and was set to cross $1,000 this year for the first time even before Sandy hit, according to the Insurance Information Institute.

Now, premiums may rise further as Sandy transforms what was an otherwise quiet hurricane season into a much more significant one. For the industry, losses that are initially estimated in the $5 to $20 billion range may actually help to eat up some of the excess capacity which has plagued it for years (pegged at $550 billion as of year-end 2011) and help insurers justify premium hikes to state regulators next year.

In fact, the hurricane could wind up being a boon for major property and casualty (P&C) players for precisely that reason. Bernstein Research, for example, observed that the knee-jerk sell-off across many of those names ahead of the storm "presents an opportunity to build positions, now at more attractive levels in the leading non-life writers to take advantage of a cyclical pricing recovery."

Bernstein's favorite names include AIG, Allstate ("best-in-the-group structural pricing power"), and Progressive, where the firm sees "an obvious and mechanical recovery trade as pricing drives a reversal in earnings momentum for 2013 and beyond".

That's less good news, of course, for households which have little choice when it comes to coughing up for homeowners' insurance, which is required for anyone holding a mortgage. And it comes not during a period of economic strength, but rather one of relative weakness.

Indeed, one of the underlying reasons that insurers have been raising premiums in recent years is to offset losses on their investment portfolios, which are under pressure because of super-low interest rates which themselves are symptomatic of the weak economy. The risk, in other words, is that by raising costs for households insurers are exacerbating the weak economy and thereby their own future earnings power.

A similar phenomenon is at play on the commercial side, where higher rates for workers compensation, if left unchecked, could prompt companies to hire fewer workers or even to let go of existing ones. Insurers are understandably eager to improve their earnings power, given their sagging return on equity in recent years. But they also must avoid being victims of their own success.

Sandy Impact on Insurance


-By CNBC's Kelly Evans