States Claim National Catastrophe Plan Would Save Taxpayers

Insurance regulators from California, Florida, Illinois and New York, on the heels of last month’s National Catastrophe Insurance Summit, are peddling a national catastrophe insurance program that they say would aid victims without burdening U.S. taxpayers.

Although the details have not yet been ironed out, the insurance commissioners say the objectives are to: protect 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.

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 proposal separates terrorism-related disasters from national catastrophes and focuses on homeowners and renters markets, not commercial properties. The plan 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 Risk Management Solutions at the summit, said the losses from Katrina–estimated at $125 billion–would be dwarfed by costs from catastrophes such as a major earthquake in the Midwest on the New Madrid Fault, a category 3 hurricane striking 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, Garamendi said the country only needs to look at the Gulf States to see the current system doesn’t work. “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 collect premiums before a disaster–not open the treasury after.

Layering coverages
The plan proposes layered coverage, placing responsibility for funding natural disaster coverage on consumers first, then insurers, then state and regional governments, and finally the federal government.

At the consumer/community level, strict building codes would be imposed. Communities would discourage residences in vulnerable areas and provide ways to help mitigate damage.

Private insurers then would be required to make catastrophic coverage available for all natural disasters, including flood. The premiums would be based on actuarially sound loss costs, including costs of reinsurance. Catastrophe reserves would be allowed to accumulate on a tax-deferred basis to help create an emergency fund for when a disaster strikes.

At the state and regional level, a fund similar to Florida’s Hurricane Catastrophe Fund would provide coverage. This layer 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 size doesn’t warrant funds of their own.

Then, the federal government would be the last layer of protection, only after the state and regional layers of coverage are exhausted. 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.

Selling the idea
New York Insurance Superintendent Mills came away from the meeting hopeful, but recognizing there is a lot of work to do to sell the idea.
“As a result of the summit, the industry has taken important steps that could eventually encourage Congress to develop a national catastrophe insurance program,” Mills 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 Commissioner, who attended the summit.

The plan was on the agenda for the National Association of Insurance Commissioners Winter Meeting scheduled for 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.

Topics Florida Catastrophe Carriers Reinsurance Hurricane