NAIC Pitched On New Disaster Approach

Industry skeptical, but Allstate and two top regulators keeppushing all-perils plan

Chicago

Industry representatives greeted a proposal for a nationalcatastrophe insurance program with skepticism at the NationalAssociation of Insurance Commissioners winter meeting here,doubting whether such a dramatic shift in policy can–or should–beimplemented in the near future.

David Snyder, assistant general counsel of the AmericanInsurance Association, said that while initial discussions of somesort of federal backstop for natural catastrophe losses could bevaluable, the current proposal goes too far, too fast. "What wehave here is one company and two states looking to nationalizetheir catastrophe costs," he said. "While I can respect theirmotives, I don't think we should wreak havoc with the presentsystem that has worked well for many years."

Other p-c associations took more equivocal stands, raising anumber of questions about the plan's main components.

Last month, the insurance commissioners of California andFlorida–John Garamendi and Kevin McCarty, respectively–sponsored anational catastrophe insurance summit that called for aprivate-state-federal partnership to fund mega-catastrophe losses,along with a new all-perils homeowners' policy to cover floodclaims. The program was detailed here during an NAIC CatastropheInsurance Working Group public hearing.

For the past several weeks, Allstate has engaged in a majorpublic relations effort to create support for the state and federalfunds called for in the proposal. "Allstate just doesn't want tohave another bad year," said one industry lobbyist. "But that isthe business they are in." The Northbrook, Ill.-based companysuffered more than $3 billion in third-quarter losses, and sincethat time has said it will greatly increase its reinsurancecoverage.

The so-called all-perils policy–which would have privateinsurers cover flood losses for the first time in decades–presentsthe most serious stumbling block at this point to widespreadacceptance, if initial reactions at the NAIC meeting are anyindication. At the Dec. 3 public hearing, Mr. McCarty acknowledgedthat some perils could be excluded–such as mold and vermin–but heremained confident flood could be included, although it wouldinvolve a major revamping of the current National Flood InsuranceProgram.

However, even Allstate representative Jim McCabe said floodlosses should be excluded at this point in the discussions.

Mr. McCarty said he hoped to refine the proposal for a meetingin February of the catastrophe insurance working group, where itcould be approved for possible final adoption at the March NAICmeeting.

Incoming NAIC President and Maine Commissioner Al Iuppa remainednon-committal, other than asserting the time was ripe for a seriousdiscussion of the issue, which he said would take place nextyear.

One commissioner who has made no bones about supporting such anall-perils policy is Mississippi Attorney General George Dale. Hischange of heart came as a result of the daily post-Katrinadesperate phone calls to his department from homeowners withoutflood insurance whose houses were destroyed.

Mr. Dale recalled a particularly heart-wrenching case of a72-year-old man whose home was worth nearly six figures, but whogot only a $6,000 check from the insurance company for thepercentage caused by wind damage. "They think I am supposed to makethese insurance companies pay, but what can I do?" said Mr. Dale,who filed suit challenging the flood exclusion for Katrina.

The two main issues have come down to flood coverage and thedollar loss figures that would trigger state and federalinvolvement in funding catastrophe losses.

Mr. McCarty said the current shortcomings of federal floodcoverage necessitate some sort of radical overhaul of the nearly40-year-old program. He said the estimated 50-to-60 percent ofthose who lost their homes in Hurricane Katrina and did not haveflood coverage underscores the scope of the problem.

Other knocks against federal flood coverage include thecomplaint it is not a risk-based insurance program, but more like afederal subsidy that does not encourage sound land use policy inflood zones.

Julie Gackenbach, Washington lobbyist for the Property-CasualtyInsurers Association of America, said she believed state regulatorscould play an important role in overhauling the flood program tomeet their concerns, and Mr. McCarty said a scaled-down NFIP couldremain in place to cover the most flood-prone areas.

Mr. Snyder joined other industry observers in criticizing theprocess that led to a proposal of such radical proportions. "Thisfirst came to light just last month at an invitation-only,NAIC-partially-sponsored summit, and then they held a publichearing…with very little notice, with the final proposal onlydelivered days before."

The one-in-50-year event trigger strikes most observers as toolow to involve government funding, as disasters at that level havebeen adequately handled so far by the private market. Mr. McCartysaid that figure was just a starting point, which had been used inprevious federal legislative funding proposals over the pastdecade.

The full NAIC passed a resolution on Dec. 4 calling for anexploration of programs to deal with national catastrophes. WhileMr. McCarty insisted the resolution merely restated longstandingNAIC policy, Mr. Snyder expressed concern there were enough"buzzwords" to give the impression the commissioners were lining upbehind the controversial proposal.

The issue has also presented some unique challenges to PCI, nowin its third year of a merger combining the National Association ofIndependent Insurers and the Alliance of American Insurers.

While Allstate is leading the charge for the public-privatepartnership, Liberty Mutual has joined with the AIA in signing aletter flatly stating the free market can handle naturalcatastrophe risk quite adequately for the time being. Allstateplayed a leading role in the old NAII, while Liberty played thesame role in the Alliance.

"We have over a thousand members with varying degrees ofopinions on this issue," said PCI's senior vice president, RobertZeman. PCI President Ernst Csiszar–who was NAIC president when heassumed his new PCI post last year–has remained circumspect when itcomes to the proposal, but does not minimize the challengesahead.

"On the political front, there has historically been very littlesupport from legislators in less disaster-prone states for federalinvolvement in federal disaster program insurance," he said.

Mr. Garamendi and Mr. McCarty planned the catastrophe summitlong before the onset of Katrina, but ultimately it will be theaftermath of that seminal event that will play a key role in itssuccess or failure.

While Mr. Hood's suit to force insurers to cover flood losses istied up in jurisdictional disputes, it has the potential to rewritethe way the industry covers catastrophic loss with the stroke of apen–particularly with so many homeowners left in the lurch,threatening the area's recovery.

The two commissioners will have to make the case that thetaxpayer/homeowner of Anywhere, USA, will end up fundingcatastrophe losses on a national basis, whether throughafter-the-fact federal relief and a subsidized flood insuranceprogram, or built into their insurance rates with some governmentbacking.

However, the insurance industry will remain a hard sell until itcan be convinced insurers will be allowed to charge the premiumsreflected in the new risk, insurer officials say.

Meanwhile, the difficulty in getting Congress to extend theTerrorism Risk Insurance Act indicates that approving a similarmechanism for natural catastrophe risk will not be a walk in thepark, industry observers contend.

Callout: (could use shot of Csiszar)

"On the political front, there has historically been very littlesupport from legislators in less disaster-prone states for federalinvolvement in federal disaster program insurance."

PCI President Ernst Csiszar

Caption for disaster shot:

Regulators did not reject a proposal for a private-state-federalpartnership to fund mega-catastrophe losses, along with a newall-perils homeowners' policy.