Insurance regulators from California, Florida, Illinois and New York, on the heels of the National Catastrophe Insurance Summit held in November, are peddling the framework for a national catastrophe insurance program that they say would protect U.S. taxpayers.
Although the details of the program have not yet been ironed out, the insurance commissioners say the objectives are to: protect habitants-renters and homeowners-by ensuring the affordability and availability of insurance against the financial consequence of natural catastrophic events; spread catastrophic risk broadly among individual insureds, insurers, reinsurers, states and the federal government in a public-private partnership; and reward mitigation of hazards.
In doing that, the commissioners propose eliminating the National Flood Insurance Program; developing state and regional catastrophe funds similar to Florida’s Hurricane Catastrophe Fund; creating a federal backstop for insurers, providing tax deferments for insurers to help build a fund earmarked for catastrophes; and developing a national commission that would help to determine premiums based on actuarial data.
The national catastrophe insurance program proposal separated terrorism-related disasters from the national catastrophes, as well as focused on the habitational market of homeowners and renters, not commercial properties. The commissioners said they did not want their proposal to detract from the Terrorism Risk Insurance Act (TRIA). A renewal of TRIA before it expires on Dec. 31, 2005, was being discussed by the U.S. House and Senate the same days of the National Catastrophe Insurance Summit.
The plan also is not designed to bailout insurers, but to help consumers in the event of a major natural catastrophe, the commissioners emphasized.
Acknowledging the problem
“There’s a profound problem that exists throughout this nation-we are not prepared to deal with a catastrophic event,” Garamendi said. A major catastrophe will come. “That’s clearly not a partisan issue.”
Economists and risk modeling companies AIR Worldwide Corp., EQECAT Inc. and RMS (Risk Management Solutions) speaking at the summit said the losses from Katrina-estimated at $125 billion-would be dwarfed by costs to recover from major catastrophes such as a major earthquake in the Midwest on the New Madrid Fault, a category 3 hurricane that strikes the Northeast, or a nuclear attack at a port in Long Beach, Calif., that could create an estimated $2 trillion in exposures.
Although the summit was planned before Hurricanes Katrina and Rita made landfall, “you only need to look at the Gulf States to see the current [catastrophe insurance] system doesn’t work,” Garamendi added. “We get a disaster, Air Force One swoops in, money, or deficit falls out the back. That’s not a good way to do it.”
When the federal government provides relief, it places a burden on all taxpayers, the commissioners said. Their alternative would help to collect premiums before a disaster-not open the treasury afterward.
A layered approach
The plan proposes layered coverage, placing responsibility for funding natural disaster coverage on consumers first, then insurers, state and regional governments, and then the federal government.
At the consumer/community level, strict building codes would be imposed and measures would be introduced to discourage consumers from residing in risky areas to help mitigate damage. The commissioners acknowledged the plan would need to take into account lower income and other residents who might not have other options for residing in less risky areas.
Private insurers then would be required to make catastrophic coverage available for all natural disasters, including flood, but not man-made terrorism losses. The premiums would be based on actuarially sound project loss costs, including costs of reinsurance. And catastrophe reserves would accumulate on a tax-deferred basis to help create an emergency fund that would be available when a disaster strikes.
At the state and regional level, a fund similar to Florida’s Hurricane Catastrophe Fund would provide coverage. This layer of coverage would begin after the first layer of catastrophic losses is reached, like reinsurance. A pool of smaller states could form a group fund if their individual size doesn’t warrant funds of their own.
Then, the federal government would be the last layer of protection. Coverage would begin after the state and regional layers of coverage have been reached. Federal funds would not come from the treasury, but instead would operate like a private reinsurance facility that would be managed by a national commission. The fund would be earmarked for catastrophe purposes only.
“The effort is not to develop a corporate shield, create a government bailout or a mechanism to give insurance companies bigger profits,” said Illinois Insurance Director Kevin McRaith. Instead, the national plan hopes to spread the liability for disaster recovery, with premiums reflecting the risk level homeowners face. “We want to allow consumers to purchase appropriate coverage at appropriate rates,” he said.
Bedeviled by the details
There was widespread agreement among the summit’s 140 attendees- insurance regulators from 16 states, insurance industry representatives, risk modeling firms, insurers and a handful of lawmakers-that a major catastrophe is inevitable and the nation needs a better system to help communities rebuild after a disaster.
“There’s been an excellent overview of the problem and we’re about to come out with a potential solution and action plan. I’m finding very little disagreement-surprisingly so,” said James Woods, a representative from the National Association of Surplus Lines Offices Ltd. (NAPSLO) and attorney with LeBouef, Lam, Greene & MacRae, as he headed into a working group during the summit.
Yet it appeared that when summit attendees were separated into smaller groups, there was some debate about at what level the different governments would get involved, and whether the fund should be pre or post funded, among other concerns.
“In the small groups it was difficult to come to a consensus,” Woods said after the working groups concluded. “In the federal participation working group, there was consensus that there should be federal participation, but it was unclear how we would trigger that. The devil is in the details.”
“I’m depressed,” lamented Steve Geller with the Florida Senate Banking and Insurance Committee and immediate past president and chair of the catastrophe subcommittee for the National Conference of Insurance Legislators (NCOIL). “I was hoping to reach more agreements than we did. This will be a tough sell.”
According to Geller, there was debate on whether the program should be focused on the issue of insurance and spreading the risk to make sure insurance companies don’t go bankrupt or whether the program should be designed to address a societal issue when people who get hit by a disaster and do not have insurance need aid.
“It’s apparent to me how wide the disagreements are,” Geller said. “The general consensus is that we need some federal backstop but when it comes down to the details, I’m not sure we’ll ever get there.”
New York Insurance Superintendent Mills was more hopeful. As a result of the summit, the industry has taken important steps that could eventually encourage Congress to develop a national catastrophe insurance program, he said. “I believe we have accomplished a great deal in getting a dialogue going. No one believes Congress is waiting with baited breath, but I believe we will see some movement.”
“I came in with lower expectations, so I’m more inclined to see this with some solid direction,” said Mike Kreidler, Washington’s Insurance Com-missioner, who attended the summit. “This was a first step. I think there are things we can do at the state level and some things at the national level, but we’re going in the right direction.”
Peddling the proposal
The proposal that emerged from the two-day summit was presented at the National Conference of Insurance Legislators in San Diego in November.
Appointed insurance regulators Michael McRaith of Illinois and Howard Mills of New York said they also would report back to governors. And the plan was scheduled to be discussed at the recent National Association of Insurance Commissioners Winter Meeting held Dec. 3-6 in Chicago.
The commissioners said they also would present the proposal to the lending industry to help build a coalition for the program. Eventually, the proposal will be sent to members of Congress.
“We will talk to governors and members of Congress to put this issue on their agenda and get the debate going,” California Insurance Commissioner John Garamendi said.
The National Catastrophe Insurance Summit was held Nov. 15-16 in Burlingame, Calif., just south of San Francisco.