Hurricane and Political Seasons Stir Up National Cat Plan Proposals

As Losses Mount for Insurers, More Proposals for a National Solution Emerge

Neither Gustav nor Ike walloped the property/casualty insurance industry the way Katrina did but there is still concern in insurance and reinsurance circles over the cumulative effect of catastrophe losses.

According to Swiss Re, Gustav will likely cost the insurance industry $8 billion; others estimated Gustav’s claims would tally between $4 billion and $10 billion. As for Ike, early estimates of insured losses came in between $6 billion and $18 billion.

That’s a lot of money but less than the $40 billion from Hurricane Katrina, which also took 1,600 lives in 2005.

However, Ike and Gustav are just the latest in a year of modest-sized catastrophes.

Worldwide there were about 400 natural catastrophes through the end of June 2008. The largest number of events ever recorded in one year was 960 in 2007. Overall losses so far in 2008 total about $50 billion. The insured losses are substantial and above the average of the last 10 years.

Robert Hartwig, chief analyst for the Insurance Information Institute, says losses are running well ahead of 2006 and 2007 figures. Hartwig reported in a webinar hosted by Munich Re and I.I.I. that 2008 catastrophe losses already exceed all of 2007 losses and are on track to overtake 2006. 2005 was by far the worst year ever for insured catastrophe losses, he added.

Analysts say the first six months of a year saw a record number of tornadoes. Heavy rain and hail and subsequent flooding in Iowa and other Midwest states also caused billion dollar losses. The overall loss caused by the floods on the Mississippi and elsewhere is likely to be around $10 billion.

Cat Fund Politics

The cumulative effect of these catastrophe losses is being monitored closely. According to Standard & Poor’s, it is possible that further accumulated losses from small catastrophes — or a substantial loss from one of the recent tropical storms — could eventually adversely affect property/casualty insurer ratings.

They are also being watched in Washington, where the active storm season and presidential politics are causing people to take another look at the various proposals to create a catastrophe plan of some kind.

Democratic nominee Sen. Barack Obama favors the concept of a federal natural disaster catastrophe plan as promoted by Florida Gov. Charlie Crist and other Southeast governors. But Sen. John McCain, the Republican presidential candidate, opposes getting the federal government involved.

There is no shortage of proposals from public policy and insurance groups and lawmakers.

Two national insurance producer organizations — the Independent Insurance Agents & Brokers of America and The Council of Insurance Agents and Brokers – along with Travelers and Nationwide Mutual are supporting a regionalized plan that would develop a uniform, federally-regulated wind policy for coastal zones from Texas to Maine.

“We’ve held extensive discussions with key members of Congress, public officials at the state and local level, insurance agents and other industry leaders and appreciate the wide range of participants who recognize this as a viable solution to a challenging market problem,” said Jay Fishman, Travelers’ chairman and CEO.

A rival plan from Hartford Financial Services Group Inc. takes a national approach. It includes mandatory flood insurance, IRA-like catastrophe accounts, subsidized premiums for homeowners and a federal reinsurance program.

CEO Ramani Ayer unveiled The Hartford’s plan, known as the “Coastal Catastrophe Partnership Plan,” which calls for cooperation between federal and state governments, homeowners and insurers in an effort to ensure access to the coastal market will be profitable for insurers.

In a release detailing its program, The Hartford said that coastal coverage is a political problem that can’t be relegated to a few regions to solve and “an honest national conversation about the threat a major disaster poses and the burden we all must bear is long overdue.”

Congress already has various bills under consideration.

The Homeowners Defense Act would create a national catastrophe fund to reinsure state natural catastrophe insurance programs. It would set up an emergency cash fund that states could access for help in rebuilding after catastrophes such as Hurricane Katrina, floods in the Midwest or wildfires in the West. The fund would be federally managed and built up over time with payments from private insurance companies.

This plan cleared the U.S. House of Representatives earlier this year before stalling in the Senate. Many Democrats, including Democratic presidential candidate Obama support it, as do a number of Southern Republican governors.

“(D)isaster insurance isn’t just an issue facing Floridians: It’s an issue facing Americans across the country,” Obama said. “This time, it was Hurricane Gustav hitting Louisiana. Next time, it could be a wildfire raging in Colorado or tornadoes tearing across Missouri. California residents saw the same type of premium increases after the Northridge earthquake of 1994 that Floridians saw in the wake of Hurricane Andrew and the brutal 2004 and 2005 hurricane seasons.”

Obama said Hurricane Katrina recovery costs each American taxpayer more than $800 in part because the country lacked an efficient national plan.

The new Republican Party platform actually includes language calling for a national catastrophe fund. But McCain and other Republicans in Congress oppose a national insurance plan because they say it would unnecessarily expand the role of the federal government into the private insurance marketplace and it would benefit some states more than others. McCain has indicated he would support a more limited plan to help just the Gulf with rising home insurance costs.

Congress also has the Homeowners Insurance Availability Act, which would let private insurers purchase reinsurance contracts directly from the U.S. Treasury to cover mega-catastrophes; the Policyholder Disaster Protection Act, which would amend tax laws to allow for the creation of insurance company disaster protection funds for the payment of catastrophe claims; and the Multiple Peril Insurance Act, which would expand the National Flood Insurance Program to cover wind events.

The call for an expanded government role in catastrophe coverage is not unanimous.

An unusual alliance of insurance and environmental groups calling itself Americans for Smart Natural Catastrophe Policy has joined the conversation. This alliance opposes having the federal government play an expanded role in natural catastrophe insurance, arguing this could cost Americans throughout the country tens of billions of dollars to subsidize homeowners living in Florida and other hurricane prone states. The coalition also opposes expanding the federal flood policy to include wind damage.

“These proposals undermine public safety by giving individuals an incentive to build homes in coastal areas that may be increasingly at risk given the potential for adverse effects of climate change. Furthermore, the legislative proposals also discourage the provision of wind insurance by the private sector,” the group said.

This group urges a focus on mitigation instead. It is asking for tax credits, loans and grants for lower income property owners to encourage them to storm-proof their homes and businesses.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., has introduced legislation along these lines to assist homeowners already living along the coasts and in financial need to strengthen their homes.

Topics Catastrophe Carriers Natural Disasters Agencies Profit Loss Flood Reinsurance Homeowners Hurricane