Insurance industry groups sought to stave off an increased government role for insurance against natural catastrophes in a House Financial Services Subcommittee hearing last week.

At the hearing, members of Congress–including three representatives from Florida and Rep. Gene Taylor, D-Miss.–appeared as witnesses to offer their views on problems facing homeowners along the Gulf and Atlantic Coasts, and how the government can help ease the situation.

Rep. Taylor–who has filed a lawsuit against State Farm over the handling of his own claim–again blasted the industry's claims practices, and charged that only those homeowners who stayed to watch their houses destroyed in the storm were treated fairly by insurers.

Since then, he said, insurers have abandoned the area, or are now charging unaffordable rates for coverage. The government, he said, should “step in where the private market won't” by offering multiperil coverage for homeowners.

Rep. Virginia Brown-Waite, R-Fla.–who has offered several catastrophe insurance bills in Congress during recent years–said lawmakers should take a proactive rather than reactive stance on catastrophe insurance, comparing the issue to the federal reinsurance backstop set up under the Terrorism Risk Insurance Act.

“Since its enactment in 2001, not one dollar of the TRIA fund has been spent, yet insurers have allocated additional capacity to terrorism risk, prices have declined, and purchase rates have increased,” she said.

The take-up rate, she noted, rose from 27 percent of companies buying terrorism coverage in 2003 to 58 percent in 2005, “without one dollar of the TRIA fund being spent.”

Insurance groups, however, argued that any coverage solution should be based more on free-market principles than increased federal involvement.

“The question lawmakers ought to be asking is, what mix of policies will maximize the private sector's ability to provide property insurance in disaster-prone areas while minimizing the risk associated with living and doing business in these areas?” Chuck Chamness, president and chief executive officer of the National Association of Mutual Insurance Companies, said in testimony submitted to the subcommittee.

In testimony at the hearing, American Insurance Association President Marc Racicot said an overwhelming majority of claims in the wake of Katrina have been settled, and that many of the more punitive measures being proposed–including a repeal of the industry's limited antitrust exemption–would ultimately do more harm than good.

“They will do nothing to improve the availability or affordability of coastal insurance, and instead will have a serious and detrimental effect on the markets they purport to assist,” he said.

Anne Spragens, senior vice president and general counsel for the Property Casualty Insurers Association of America, said there could be a role for the federal government to play in catastrophe insurance, but it should take the form of liquidity protections and be triggered “at a very high level” as carriers pay claims in the aftermath of an event.

Among the proposals to help ease affordability and availability problems for coastal homeowners is the potential sale of reinsurance by the federal government–either directly to insurers, or to state catastrophe funds.

Among the most ardent supporters of a system in which a federal catastrophe pool would serve as a backstop for state pools is ProtectingAmerica.org, which counts Allstate as one of its members.

At the hearing, ProtectingAmerica.org Executive Director Robert Porter said a backstop is necessary given the enormous losses in the past few years and projections that future storm seasons will be as bad or worse.

A state/federal catastrophe pool system, using “actuarially sound” pricing, would help ensure that taxpayers do not bear the burden of insurer losses, he said.

“These state funds would be financed through mandatory contributions by insurance companies in each of those states in an amount that reflects the risk of policies they write in each state,” he explained. “Actuarially sound premiums, not tax dollars, would support those funds.”

Additionally, he said because each state would only provide coverage for their own risks, such a system would keep the burden of losses solely on the involved insurers.

“Because this is an opt-in, state-by-state program based entirely on each state's risk, the likelihood of a taxpayer subsidy is virtually eliminated,” he said. “This approach requires pre-event funding and relies on private dollars from insurance companies in those states that are most exposed to catastrophe.”

Frank Nutter, president of the Reinsurance Association of America, disagreed with that stance, saying such a plan would run afoul of the basic principle of insurance by concentrating the risk within those particular states. Florida already has a state catastrophe fund that offers reinsurance, and Mr. Nutter noted that such a system still places the burden of a catastrophe on taxpayers.

“The effect is that insurers have off-loaded a substantial part of their property risk to a government catastrophe fund, and that government fund assesses its citizens to make up for the revenue shortfall caused by low upfront catastrophe fund reinsurance premiums,” he said. “Policyholders from all lines of insurance, including those at low risk to catastrophes, are being required to insure insurance companies.”

Private market reinsurers can spread that risk throughout their operations around the globe, he said, suggesting that Congress should focus instead on removing the roadblocks placed on the reinsurance market–such as price controls or coverage mandates.

“By removing regulatory constraints, policymakers will maximize private sector risk bearing,” he said.

Special Reports /

Insurance Groups Argue Against Creating Federal Natural Catastrophe Fund

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