The private insurance marketplace, not the federal government, is the best vehicle to address coastal insurance issues and natural disasters in the U.S., according to insurers. Even so, the federal government can play a role in efforts to reduce affordability and availability problems in coastal regions, agreed some insurers and agents.
Two Senate committees—the Committee on Banking, Housing and Urban Affairs, and the Committee on Commerce, Science and Transportation—met to examine the response of the insurance industry to the claims filed by homeowners and business owners in the wake of the calamitous 2005 hurricane season and the need for a national solution for natural disaster coverage.
“Put simply, insuring against natural disasters is a national problem that requires a national solution,” the Independent Insurance Agents and Brokers of America. “Despite our longstanding position that the insurance market is best served by limited federal involvement, we believe that a federal solution to the issue of natural catastrophe insurance is necessary to help provide capacity and fill a void that the private market cannot and will not service.”
Franklin W. Nutter, president of the Reinsurance Association of America (RAA), testified that creating federal and state catastrophe reinsurance funds would not solve the homeowners’ insurance availability problem. He offered that cat funds do not reduce the vulnerability of people to natural catastrophes. Nutter stated, “There is no evidence that state reinsurance catastrophe funds result in greater availability or affordability of homeowners’ insurance.” “Instead,” he stressed, “These funds are effectively a cost shifting mechanism—low risk policyholders end up insuring high risk policyholders.
“The private reinsurance market is financially strong and robust, and to create state catastrophe funds violates one of the fundamental tenets of insurance—spreading risk among various bearers,” Nutter said.
American Insurance Association (AIA) President Marc Racicot called on Congress to take a holistic approach to addressing the problems posed by natural catastrophes.
“There are no shortcuts to addressing these problems, and all of us must remain committed to solutions that guarantee long-term stability in the private markets to protect our economy and, more importantly, to provide certainty to the nation’s insurance consumers,” Racicot said during testimony before the U.S. Senate Banking Committee’s hearing entitled “An Examination of the Availability and Affordability of Property and Casualty Insurance in the Gulf Coast and Other Coastal Regions.”
“The solution to the current stress being felt in the property insurance market in several Atlantic and Gulf Coast states is to improve, not displace, the private sector’s ability to serve homeowners and businesses in the path of potential storms,” stated Racicot.
The Property Casualty Insurers Association of America believes there is a role, properly structured, for the federal government to play in assisting the financing of mega-catastrophe risk, and recommends a range of changes, including market reforms, stronger loss reduction and prevention, and new approaches to financing these risks.
“Government, consumers and insurers must work together to put in place viable solutions to reduce losses from future catastrophes and speed relief to those who need it after the next natural disaster hits,” says Ben McKay, PCI’s senior vice president, federal government relations.
National Association of Mutual Insurance Companies’ President and CEO Chuck Chamness testified that while there is a developing insurance crisis along the U.S. coastal regions, legislative initiatives could either help or, in some cases, worsen the situation.
“It is widely acknowledged that property insurance has become more expensive and somewhat less available in coastal regions of the U.S.,” Chamness said. “While government and the private sector can and should work together to address this problem, we should not delude ourselves into thinking that economic principles affecting the relationship between supply, demand, and price can be erased by government regulation and programs.”
Chamness outlined three factors responsible for the problem:
• The exposure of densely concentrated, high-value property to elevated levels of catastrophe risk in certain coastal regions means property insurance there will be relatively expensive compared to regions that lack one or both of these attributes.
• As the population growth in these regions increases, the number of people and businesses faced with relatively high insurance costs will also increase.
• U.S. coastal regions have experienced increased population growth and commercial development at a time when the frequency and severity of catastrophic storms in these regions are increasing.
“Simply put, the availability and affordability of property insurance in coastal regions are mainly functions of risk,” Chamness testified. “But other variables, including actions taken by government, can also affect the supply and cost of insurance.”
Chamness explained that several recently proposed initiatives could actually hinder efforts to provide more affordable, available insurance. Florida lawmakers, for example, removed restrictions on the ability of the Citizens Property Insurance Corporation to compete with private insurers, while canceling rate increases that had been approved to reduce the disparity between the levels of risk assumed by Citizens and the relatively low premiums it charges. Also, lawmakers doubled the risk-bearing capacity of the Florida Hurricane Catastrophe Fund to $32 billion. Even though there is only $1 billion in the fund, it now has a legislative mandate to assume a level of catastrophe risk exposure more than 30 times that amount. “Thus, if even one major storm hits the state this year, all Florida insurance consumers will face huge assessments and significant tax increases,” Chamness said.
Chamness added that a federal proposal to add wind hazard to the National Flood Insurance Program is cause for concern since the program would need to build a very large loss reserve very quickly to avoid the under-reserving problem already plaguing the NFIP, which is more than $20 billion in debt.
Chamness explained that a federal catastrophe fund would be unnecessary, except in the event of a true mega-catastrophe.
The Big “I” testified that its members are “keenly aware of the unmet need for insurance coverage in at-risk areas. … We strongly believe our industry must come together with policymakers to find a solution that will encourage participation in at-risk markets. In short, we welcome all proposals and will support any reasonable plan that leads to a healthy and competitive insurance marketplace in which consumers have choices and companies are vying for their business.”
The Big “I” expressed its support for H.R. 330, the Homeowners’ Insurance Availability Act, sponsored by Rep. Ginny Brown-Waite (R-FL), and its willingness to consider other approaches. The legislation would allow private insurers to purchase, at auction, reinsurance contracts directly from the U.S. Treasury to cover natural disasters that are equal to or greater than a one-in-100-year event.
Natural disaster risk poses a looming crisis for consumers, the Big “I” noted.
Growing populations on the coast
The U.S. population residing in hurricane-prone states continues to rise, a trend which is likely to impact adversely the nation’s coastal property insurance market for years to come, testified Dr. Robert Hartwig, president and chief economist for the Insurance Information Institute (I.I.I.).
Hartwig told the U.S. Senate Committee on Banking, Housing, and Urban Affairs that despite the well-known vulnerability to hurricanes and rapidly escalating property values, coastal development in high risk areas continues at a furious pace. Hartwig said, 15 new condominium projects, with a total of more than 2,100 units, will be completed by year-end 2009 in South Miami Beach, Fla.
“Rapid build-ups are also observed in many other coastal areas, including Galveston Island, Texas; Hilton Head and Myrtle Beach, South Carolina; the Maryland shore; eastern Long Island; and Cape Cod,” Hartwig noted.
Florida has the highest population growth among hurricane-prone states and is expected to gain 12.7 million new residents between 2000 and 2030, according to the U.S. Census Bureau. “Florida is the most exposed state in the country, by far, accounting for 27 percent of all hurricane exposed property. Adjusting for growth since 2004, insured coastal exposure in the state now exceeds $2 trillion. Although New York is a close second, it is statistically less likely to be hit by major hurricanes than Florida,” Hartwig said. “It is expected that the value of insured coastal property will double within the next decade as coastal populations and property values continue to soar.”
Hartwig, who spoke before the U.S. Senate committee’s hearing, An Examination of the Availability and Affordability of Property and Casualty Insurance in the Gulf Coast and other Coastal Regions, noted that the price of insurance is determined primarily by the degree of risk assumed by the insurer. “Hurricane Katrina revealed that too many U.S. coastal structures are unable to withstand the forces of a major hurricane, the importance of prudent zoning and land-use management, and that private-sector insurers provide by far the fastest, most efficient means of economic recovery for communities affected by disaster,” Hartwig said. “Insurers paid more than $40 billion to 1.7 million U.S. policyholders in six states after Hurricane Katrina struck in August 2005.”
According to Hartwig, state-run insurers of last resort have offered little short-term property insurance rate relief to hurricane-prone regions of the country and may end up shifting the long-term risks of hurricane-related losses to policyholders and taxpayers who do not live near the coast.
“Depending on the state, the redistribution of costs is commonly achieved via laws that allow state-run insurers (which are often the largest insurers in the most hazardous areas) to recover their losses in excess of their claims-paying resources by assessing (effectively taxing) the insurance policies of homeowners and business owners throughout the state, including those well away from the coast and those who have never filed a claim,” Hartwig said. “In some cases, even unrelated types of insurance such as auto insurance and commercial liability coverage can be assessed.”
Source: PCI, IIABA, AIA, RAA, III, NAMIC
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