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Allstate Reduces Risk In New York Insurance Retrenchment

Allstate Corp., the largest publicly traded company that insures personal property and automobiles in the United States, continues to try to reduce its fortuitous loss risk exposure to the greater New York City region. Allstate took huge losses in the 2005 hurricane season when Hurricane Katrina devastated New Orleans and the state of Louisiana, where the insurer had no backup coverage from reinsurance, and Hurricane Rita hit Texas. Together the two storms cost Allstate more than $3 billion in losses. As a result of new underwriting guidelines put into place as a result of such 2005 storm losses, Allstate previously announced that it would cease initiating new home insurance in Westchester County, Long Island or the five boroughs of New York City since it felt was over-exposed to possible major hurricane losses with a 26% market share along the southern New York shoreline. Throughout New York State, Allstate is reported to have an 18% market-share.

Now on February 6, 2006, according to the Newsday article entitled Allstate pullout elicits rebuke, Allstate is going a step further. It has announced that it would cease renewing some of its homeowners policies in the greater New York City area as a method of further reducing its risk exposure to the region. This action received a rebuke from New York State Insurance Superintendent Howard Mills who has called for a public fact-finding hearing on February 27th. "It's fair to point out that Allstate has a large concentration of risk, and that is the reason they are taking this action," Mills said. "But that doesn't mean I approve of it." Spokesmen for two other large insurers, State Farm Insurance and Nationwide Insurance, said they have no plans to reduce coverage in the New York area.

Allstate has an interesting problem. It has a profitable business underwriting homes in the New York City area and has just received approval for an 8.5% percent increase in premiums. However, the New York City area has not had a major hurricane strike since 1938 when a major hurricane did hit Long Island and Massachusetts, causing hundreds of millions in damage and costing nearly a thousand lives, according to Robert Hartwig, chief economist of the Insurance Information Institute, a trade group.. The wall of water caused by that hurricane traveled a mile inland and one can easily imagine the many millions of dollars of property value that are within a mile of the coastline today. Sen. Charles Schumer (D., N.Y.) has criticized Allstate, saying that the hurricane risk is "bogus" and has demanded that the company reinstate coverage without raising premiums. "The likelihood of a severe hurricane hitting in New York City is one in every 500 years," said Sen. Schumer. Certainly, no one forecast four major hurricanes to hit the Southern United States in one year or the more than $10 billion of damage from Hurricane Wilma in October 2005 that Florida experienced (on top of the 2004 storm damages).

The real question is what frequency is appropriate to use currently in forecasting major hurricanes hitting the United States seaboard? There is considerable debate on-going within the meteorology and hurricane forecasting community. Some say that global warming is the cause of increased intense storm activity. Others equally as strongly disagree. Toomre Capital Markets falls in the camp that the severe hurricane frequency has increased somewhat. The problem is that no one can really predict whether the chance of a major hurricane hitting New York City is a one in twenty, one in fifty, one in a hundred or a one in five hundred year event as Sen. Schumer suggests. Thoughts and comments are welcome.