Insurance Commissioners Announce Framework for National Cat Program

By | November 17, 2005

Concluding the two-day National Catastrophe Insurance Summit held in Burlingame, Calif., insurance commissioners from California, Florida, Illinois and New York on Wednesday agreed that they had a basic framework for a national catastrophe insurance program—but the details were not yet ironed out.

The key objectives of the plan are to: protect consumers 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 proposed eliminating the National Flood Insurance Program, developing state 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 plan is not designed to bailout insurers, but to help consumers in the event of a major catastrophe, the commissioners emphasized.

The proposal is being presented at the National Conference of Insurance Legislators in San Diego today. Appointed insurance regulators Michael McRaith of Illinois and Howard Mills of New York said they also would report back to their governors about the summit outcome.

Additionally, the plan will be discussed at the upcoming National Association of Insurance Commissioners Winter Meeting to be held Dec. 3-6 in Chicago. The commissioners said they would present the proposal to the lending industry to help build a coalition for the program. And the proposal eventually 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.

Wednesday’s final plan did not match every element of the proposal the insurance commissioners had suggested on Tuesday, when the National Catastrophe Summit began. Key differences included separating terrorism-related disasters from the national catastrophe insurance program and focusing on the habitational market of homeowners and renters, not commercial properties. Initially, the commissioners said all disasters, terrorism included, should be covered.

“The convening committee of commissioners considered what was being done with TRIA and thought that it was more effective not to distract from that,” said Rick Baum of the California Department of Insurance. “Maybe some point down the road there may be a way to make terrorism catastrophes part of this program, but right now they’re focused on homeowners.”

It appeared as if the changes from the initial plan stemmed in part from debate that occurred during smaller summit working groups—on community and consumer responsibilities; private insurer participation; state participation; and federal participation—that were held Wednesday afternoon.

Initially, everyone agreed a major catastrophe is inevitable and the nation needs a better system to help communities rebuild than handing out money after the fact.

“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.

Yet it appeared that when summit attendees were separated into those smaller working groups, disagreements emerged about how to get the federal government and at what level 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—despite the lack of consensus. 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 Commissioner, 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.”

However the plan evolves, there was agreement, at least, on 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.”

The National Catastrophe Insurance Summit, held Nov. 15-16 in Burlingame just south of San Francisco, attracted approximately 140 attendees, including regulators from 16 states, insurance industry representatives, risk modeling firms, insurers and a handful of lawmakers.

Outside the event, a few community groups protested discrimination by the insurance industry.

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