(Reuters) - The deadly start to the 2012 tornado season is forcing insurers to reconsider the risks of coverage in the most storm-prone parts of the United States and industry insiders say they may have to rethink how they handle the underwriting of the reoccurring natural disasters.

Unfortunately, homeowners may find themselves either paying substantially higher rates or not having insurance at all, as insurers try to manage their exposure to what is clearly a growing concern by diversifying geographically and tightening their standards.

The U.S. insurance industry lost nearly $26 billion on tornadoes and related storms in 2011, higher than the previous record, and insurers have already lost as much as $2 billion this year.

But that total is still 50 percent less than what Hurricane Katrina cost the industry in 2005. Still, more bad news could be on the horizon as the bulk of last year's losses came in April and May, and the peak of tornado season runs through July.

Disaster modeler Eqecat said the total number of tornadoes recorded this year to date is more than twice the seven-year average. It was Eqecat that estimated industry losses from last week's storms at $1 billion to $2 billion.

"While it's not to the same scale as what a major hurricane could do to a Florida or the Eastern coastal states, I think the risk of severe thunderstorms is growing and awareness is growing," said Brad Lemons, vice president of product and pricing at Nationwide Mutual, the eighth-largest property insurer in the country.

Nationwide Insurance, as with others in the industry, is trying a mix of different things like diversifying geographically to moderate its exposure to the most risky locations, tightening underwriting standards and charging more where it can.


Homeowners in hard-hit states are already paying the cost this year. For example, State Farm, the country's largest home and auto insurer, received approval from regulators for a 5 percent hike in owner-occupied homeowners insurance rates in Alabama as of last November. In Mississippi, it sought a 15.8 percent rate hike for its manufactured housing coverage.

Those rate rises are small in comparison to what people in Louisiana and Florida experienced post-Katrina where many people were paying double within three years.

The tornadoes on Friday generated another 6,300 claims for State Farm in just the first day after impact.

In a statement, State Farm said its response to risk is considered over time and not based on any one event, much like other insurers who say recent rate hikes are more about planning for the future than recovering past losses.

"While recent claims experience is often an indicator of future claims experience, catastrophe claims experience tends to be aberrational. We evaluate catastrophe claims experience over longer periods of time than we do other types of claims experience," the company said.

The Consumer Federation of America, in a February study written by a former Texas insurance commissioner, claimed homeowners were paying 10 times more out of pocket for damage after Katrina than after Hurricane Andrew in 1992, and rates have rose further since that time.

It is not just homeowners, though; car owners are also feeling the pain. In tornado-hit states, new research suggests catastrophe losses are contributing directly to higher costs, even in the highly competitive world of auto insurance.

"The more we've seen tornadoes hit the Midwest, it would be a factor there," said Amy Danise, editorial director of Insure.com, which does comparisons on state-by-state auto insurance rates. "When you're seeing these storms sweep through multiple times in one season, that's where you'll definitely see a correlation."

Insure.com's survey, looking at rates from six of the largest carriers in the country, found that storm-prone states like Louisiana and Oklahoma top the list, while rates in places like Wisconsin and Maine can be as much as two-thirds less.


The phrase "perfect storm" is overused, but in last Friday's case, it might well be true.

"Nearly every factor meteorologists look for when forecasting severe thunderstorms and tornadoes was in place," AccuWeather said in a report Monday.

Given how frequent twisters have become in the last year or so, one solution for the industry is to simply get out of the storms' way.

While it is rare for an insurer to go out of business or fail outright -- 23 property and casualty insurers failed from 2008 to 2011, according to the National Conference of Insurance Guaranty Funds. Last May, Alfa Mutual stopped writing policies on older Alabama homes in the face of tornado losses.

For larger insurers wary of a similar fate, that means not putting all of their eggs in one regional basket.

"As the severity of a tornado increases, as you get up to an F5, it's less about the quality of risk actually and more about the quantity of risk," said Erik Nikodem, a senior vice president of the AIG unit Lexington Insurance. "We're paying a lot of attention to the amount of the risk that we have and the aggregation of the risk in a geographic concentration."

It also means making changes in how risks are assessed and how policies are written. Travelers, a top-10 property insurer, said in late January it is continuing to push underwriting changes to improve its profitability.

"(We) are underwriting for age and quality of roof, reassessing how we factor in the number and type of previous claims, and implementing higher minimum deductibles for weather and non-weather claims," CEO Jay Fishman said on a conference call with analysts.

(Reporting By Ben Berkowitz; Editing by Bernard Orr)

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