A pre-established formulaic predictability model would virtually solve the issue of indeterminable loss cause that was so wide-spread in the aftermath of Hurricane Katrina, according to South Carolina’s Insurance Regulator.
South Carolina Insurance Director Scott Richardson is proposing a loss-allocation method that he hopes will alleviate any confusion between water damage and wind damage the next time a hurricane reduces homes and businesses to nothing more than concrete slabs.
Concern about ongoing Katrina litigation and the precarious payment (or nonpayment) process prompted Richardson’s question, “What can we do to keep it from happening next time?”
“When there’s not even a toothpick left, who knows what really caused the damage?” Richardson asked. “It has resulted in thousands of lawsuits in Louisiana and Mississippi – they’re figuring it out as they go and making settlements. Why can’t we do that before hand with a formula based on science and available technology? There’s got to be one we can all agree on.”
Using the latest flood maps, tidal surge history based on geographic location and potential wind speed models, Richardson is positive that a workable solution is at hand.
“It might not be perfect but it could be reasonable,” he said.
Richardson took the first step in a long overdue process when he presented his proposal to the National Association of Insurance Commissioners at their annual conference in Washington D.C. last month. He said the next step is to get actuaries involved and ask them to share their loss data from Katrina.
“I envision a one- or two-day conference where we would drill deep into every aspect,” Richardson said. “Everyone would have a seat at the table.”
Richardson suggests that by speaking only about establishing a predictability formula – not rates or prices – that the typical barriers between professions or politics would be set aside.
In the Director’s view, a pre-established formula would help to bring resolution to the insurance industry’s two most pressing and important issues.
“The consumer gets his money immediately and that equates to happy customers,” Richardson said. “When consumers buy a policy they expect to get paid in the event of a payable occurrence.”
For insurers, Richardson said, a formula would create predictability.
“Insurance is all about predictability. If you can predict it, you can insure it,” he said.
If you can absolutely pinpoint probable maximum loss versus a reinsurer’s 100 percent loss method, the cost of reinsurance will go down too, Richardson added.
A pre-established formula is an acceptable and quantifiable way of resolving the issue and it takes mystery out of the payment process, according to Richardson.
“It’s a tall order but we have to do it. The technology is already there – we just have to plug it in,” Richardson said. “What we’re doing now is not working. When in doubt – after the next Hurricane Katrina – we can just go to the formula.”
Richardson concedes that the process will need buy-in from the National Flood Insurance Program administrators. He said the existence of the formulaic process would encourage people to buy flood insurance.
“We need to make flood maps more accurate – in the most catastrophe-prone areas,” Richardson said. “The technology is there.”
Topics Profit Loss Flood South Carolina
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