Whether the nation needs a federal or other governmental program to deal with insurance costs and availability for natural catastrophes in U.S. coastal states was the central question at a public hearing in Mobile, Ala., Monday.
Dozens of citizens gathered to listen as politicians, regulators and insurers presented possible answers during a half-day session hosted by the National Association of Insurance Commissioners.
Dave Hill, vice president and regulatory general counsel for State Farm Insurance, said the storms that wreaked havoc in Florida and along the Gulf Coast in 2004 and 2005 demonstrated the need for both public and private efforts to prepare for mega catastrophes – before they occur.
“The time to address preparation for mega catastrophes is now – before the unthinkable, but inevitable, occurs,” Hill said. “We need a coherent, comprehensive, and coordinated approach involving the American citizenry, private insurers, and local state and federal governments.”
Hill said creating a federal backstop for state catastrophe funds to help with pre-event funding for natural catastrophic disasters is vital to adequate preparation and helps protect taxpayers against unbudgeted appropriations. “It’s inevitable that we will experience disasters that exceed the capacity of the private sector and state catastrophe funds,” he said.
Hill added that the nationwide adoption of modern and effectively enforced statewide building codes would go a long way in reducing losses in the aftermath of natural disasters.
U.S. Rep. Tim Mahoney, R-Fla., attended Monday’s hearing telephonically and presented a summary of a bill he co-sponsored with U.S. Rep. Ron Klein, D-Fla. The Homeowners’ Defense Act of 2007 would establish a federally-administered catastrophic insurance program to issue bonds that would provide backstop coverage to state-sponsored insurance funds following a natural disaster, according to Mahoney.
Mahoney said the legislation allows states to responsibly plan for disasters ahead of time, while providing emergency relief for states located in lower-risk regions.
Mississippi Insurance Commissioner George Dale, attending the hearing along with his regulatory cohorts from Florida, Louisiana, Alabama, Arkansas, South Carolina and the Virgin Islands, said the hearing was time well spent and that “some good information was brought forward.”
Dale agrees that a coalition of state, federal and free enterprise entities needs to be established. “We need federal involvement in the form of funding, but it should come under state control,” he said. “Coastal writing is a complex issue.”
John Miletti of The Travelers said the primary challenges for consumers are availability and affordability while policy makers have to consider economic growth and disaster recovery. Insurance carriers must deal with each state’s regulatory environment and reasonable long-term profitability, he added.
Travelers has announced its own proposal for discussion, one that would join states from Maine to Texas in a regional catastrophe plan. The program would continue state regulation for certain matters including solvency and residual market regulation while maintaining a market of last resort as a safety net. It would also ensure that the rating approach is consistent with a federal program for pre- and post-event funding.
The Travelers scenario would change the CAT reserve accounting approach to “accrued over time” rather than when incurred, according to Miletti, and people living in coastal and flood zones would be required to participate in the National Flood Insurance Program. The federal government would provide economic incentives for states based on their adoption and enforcement of federal building standards and other mitigation/loss reduction programs, Miletti added.
Louisiana Commissioner of Insurance James Donelon said, “We are open to all solutions. We hope these will come from the private sector but we will need a federal solution as well.”
Donelon said he will continue his push for a federal catastrophe fund and urge his fellow commissioners to hold future public meetings on the insurance issues affecting the coastal states.
The Klein/Mahoney Homeowners’ Defense Act states that the federal government would be responsible for packaging and issuing bonds to provide high-level insurance coverage to the state-sponsored insurance funds. Revenue raised from the bonds would be combined with the revenue brought in from the state-sponsored insurance funds’ premium payment and held in a “firewalled” Treasury account comprised of high grade securities. In the event that a covered natural disaster were to occur, the federal government would provide funding to the state-sponsored insurance funds from the firewalled Treasury account to meet the terms of the catastrophic insurance contract.
The direct federal loan element of HR 3355 would operate concurrently with the bonding component and would provide assistance to state-sponsored insurance funds during periods where the federal catastrophe bond reserves fall below a certain threshold, according to the bill summary.
Arkansas Insurance Commissioner Julie Benafield Bowman said she was taking part in the forum because the “coastal insurance issue is a national issue, not just an issue for one state.”
Monday’s hearing in Mobile was a precursor to a follow-on session to be held Friday at the NAIC national convention in Washington D.C.
Source: National Association of Insurance Commissioners
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