The National Association of Mutual Insurance Companies (NAMIC) has adopted a statement on natural disasters that asserts a flexible regulatory environment in which insurers are free to price coverage based on risk will create incentives for property owners in high-risk areas to invest in loss mitigation measures. NAMIC contends that only risk-based pricing will foster greater competition among insurers and increase the availability of property insurance in disaster-prone areas.
The statement’s four general principles:
· Market freedom and competitive pricing will lead to innovation in developing solutions to problems relating to disaster insurance and mitigation;
· Competitive pricing and risk-based underwriting are essential to developing and maintaining a viable disaster insurance market;
· Mitigation must be an indispensable aspect of any disaster risk management and insurance initiatives; and
· The National Flood Insurance Program should be maintained, but must be reformed.
“This new public policy statement represents the culmination of a six-month effort by representatives from 20 NAMIC member companies, who worked closely with staff in studying and discussing a sizable body of literature on natural disaster issues,” said NAMIC President and CEO Chuck Chamness. NAMIC believes the statement will serve to guide its member company representatives and staff as the natural disaster debate evolves.
The statement also notes that lawmakers and/or regulators sometimes impose rating and underwriting restrictions on property insurers that allow high-risk property owners to pay artificially low premiums, forcing lower-risk property owners to subsidize the insurance costs of high-risk buyers by paying inflated premiums.
“NAMIC believes that using the insurance pricing mechanism to create hidden cross-subsidies among risk classes is not good public policy,” the statement concludes.
The statement notes that the private marketplace thus far has had the capacity to handle natural disasters, but that in a restrictive regulatory environment, a mega-catastrophe comparable to the 1906 San Francisco earthquake could test or exceed that capacity. According to NAMIC, that, in turn, could create a situation where many insurers could potentially be unable to meet their claim obligations and still offer protection going forward. “This would be particularly true where some insurers had established separate single state companies as a way to manage their exposure,” says NAMIC. Consideration of state or federal programs designed to respond to a mega-event may be appropriate, according to the NAMIC statement.
On the subject of mitigation, the policy statement asserts that effective mitigation efforts, including the development of strong building codes as well as responsible land-use planning, have been shown to greatly reduce the level of property damage and human suffering caused by natural disasters.
“NAMIC supports the concept of federal legislation that would create financial incentives to encourage states to adopt and enforce strong, statewide building codes,” the statement reads, adding, “With respect to existing properties, NAMIC supports government initiatives to create mitigation grant programs to enable homeowners in high-risk areas to invest in risk mitigation measures.”
The policy statement concludes by noting that although the National Flood Insurance Program (NFIP) has operated continuously since 1968, Hurricane Katrina exposed serious shortcomings that must be addressed. NAMIC says to enhance the economic efficiency and financial stability of the NFIP, premiums should be actuarially sound; and the program’s borrowing authority increased; funding should be increased for the flood hazard mapping program; and stiffer penalties imposed on financial institutions that fail to require flood coverage; and that additional resources should be allocated to improve NFIP public education efforts.
The NAMIC Task Force on Natural Disasters was chaired by Kevin Meskell, executive vice president of Quincy Mutual Fire Insurance Company of Quincy, Mass.
The NAMIC Statement of Principles on Natural Disasters is available at http://www.namic.org/pdf/06CatPrinciplesStatement.pdf.
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