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Who Pays for Hurricane Sandy Damages? More Than Just Your Insurance Company

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Reinsurers, a.k.a., insurance for insurance companies, will foot a large portion of the Sandy bill. So will taxpayers.

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MINYANVILLE ORIGINAL In terms of financial damage wreaked by Hurricane Sandy, there's good and bad news. The good news is that despite its severity, Sandy losses will not come close to those from 2005's Hurricane Katrina. The bad? Sandy will still likely become one of the five most expensive hurricanes in history.

According to disaster modeling company Eqecat, insured losses from Sandy will total some $20 billion when all is said and done, double the damage from last year's Hurricane Irene.

Which are the property and catastrophe (P&C) insurance companies most exposed to Sandy?

Steven G. Bazil, founding partner of Bazil McNulty, a law firm that represents insurance companies around the world, tells Minyanville that the list probably includes the usual suspects such as Ace (NYSE:ACE), Allstate (NYSE:ALL), AIG (NYSE:AIG), Chubb (NYSE:CB), Cincinnati Financial (NASDAQ:CINF), Progressive (NYSE:PGR), Hartford (NYSE:HIG), Arch (NYSE:ACGL), and Travelers (NYSE:TRV).

But when victims of Sandy receive their insurance payouts, they might be surprised to learn that the money does not actually come from the primary insurers from whom they bought their P&C policies. Insurance companies also purchase insurance, as it turns out. They buy them from reinsurance companies to protect them from catastrophic events that triggers a large number of payouts.

"Reinsurance works in a similar way to how you and I would buy a homeowner's policy or auto policy from Geico, where we can decide the deductible amount and the types of coverage limits we want to have," explains Roberts DiUbaldo, a New York-based attorney from Edwards Wildman, whose practice is focused on US and international insurance and reinsurance companies. "It's the same principle except that reinsurance is negotiated between the insurance companies and reinsurance company," he tells Minyanville.

So major reinsurers like Munich Re (BIT:MUV2), Swiss Re (PINK:SSREY), Berkshire Hathaway (NYSE:BRK.A) (which owns Geico), and Everest RE (NYSE:RE) could sign contracts where they reimburse 100% of what insurance companies pay out to P&C claimants, or they could have treaties where if an insured part has a $5 million loss, the reinsurer covers $2 million and the insurer pays $3 million because it did not purchase coverage for that amount. Such an agreement is termed an excess of loss treaty. Many reinsurance contracts are shared among several reinsurers in the same way lenders syndicate large credit facilities among several banks.
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