Insurance industry representatives had their hands full on Capitol Hill last week during two nearly simultaneous congressional hearings about Hurricane Katrina's fallout, as Sen. Trent Lott, R-Miss., tried to split insurers on their antitrust exemption.

Sen. Lott–who is pursuing his own lawsuit against his homeowners insurer, State Farm–sought support during a hearing of the Senate Commerce Committee from smaller insurers for a repeal of the McCarran Ferguson Act's federal antitrust exemption by raising the possibility of a “safe harbor” that would apply to them but not to major nationwide companies.

At the same time, the Senate Banking Committee, chaired by Sen. Chris Dodd, D-Conn.–a presidential candidate–trained its spotlight on property insurance affordability and availability in high-risk areas, and the potential of a national catastrophe fund to solve the capacity problem.

However, throwing cold water on that idea was Edward Lazear, chair of the Council of Economic Advisors, who told the Banking Committee hearing that the Bush administration “opposes legislation to create a new federal program to backstop catastrophe insurance.” He said the White House also opposes expanding the scope of the National Flood Insurance Program to cover additional exposures.

If enacted, Mr. Lazear said the administration believes a federal catastrophe backstop–dealing either with state funds or directly with insurers–would undermine the private market and could encourage the type of development that has increased the catastrophe risk problem.

“National catastrophe risk insurance would displace private insurance and undermine the economic incentives to mitigate risk,” he said. “It would force all taxpayers nationwide to subsidize insurance rates for the benefit of a relatively small group of people in high-risk areas. This would be both costly and unfair to taxpayers.”

Representatives of primary insurers appearing before the panel urged lawmakers to take a cautious approach in crafting policy, and to especially avoid needless punitive measures resulting from some of the well-publicized problems after Katrina.

“The reality is that there are no quick fixes,” said Marc Racicot, president of the American Insurance Association, referring to the affordability and availability issues affecting coastal regions.

However, he added that “punitive measures–including recently introduced bills to repeal the McCarran-Ferguson Act–are wholly unrelated, and the cruel irony is that they would have a serious and detrimental effect on the markets they purport to assist.”

Charles Chamness, president of the National Association of Mutual Insurance Companies, said lawmakers need to remember the basic principle of insurance and what their actions could mean to the market. “Simply put, the availability and affordability of property insurance in coastal regions is mainly a function of risk,” he said. “But other variables, including actions taken by government, can also affect the supply and cost of risk.”

Mr. Chamness also expressed opposition to the repeal of the industry's limited antitrust exemption and offered support for legislation that creates tax incentives for homeowners to mitigate against wind-related exposures.

The appeals by Mr. Racicot and Mr. Chamness might have been better suited for the Commerce Committee hearing, at which Sen. Lott accused major insurers of “hiding behind” small insurers in seeking to retain their antitrust exemption. He said “big insurers” are claiming that repeal of McCarran-Ferguson would inordinately affect smaller insurers, which need access to pooled claims and other shared data.

Sen. Lott–along with Mississippi Attorney General Jim Hood, who spoke as a witness before the commerce panel–leveled numerous accusations of misdeeds against the industry in handling claims resulting from Hurricanes Katrina and Rita in 2005.

In his comments, Sen. Lott characterized the insurance industry's conduct in handling those claims as “outrageous, arrogant and mean-spirited.”

Mr. Hood, he said, had “a lot of evidence of misconduct and fraud” by State Farm in considering criminal charges against the company, but decided instead on a more “practical solution” in reaching a settlement agreement with the insurer.

In his testimony, Mr. Hood said he settled with State Farm because the company told him it would pull completely out of Mississippi if indicted. Since the firm is by far the state's largest insurer, that would hurt the state because it would have been difficult to find alternative capacity, he explained.

Both Sen. Lott and Mr. Hood also cited recent allegations that State Farm had threatened to fire an engineering firm it hired to inspect storm-damaged homes in Mississippi and Louisiana. A story carried by the Associated Press out of New Orleans last Wednesday cited evidence that the engineering firm's management “suggested in e-mails that the insurer was dissatisfied with how it was reporting damage.”

Although Sen. Lott dominated the proceedings, the hearing was run by the chairman of the Commerce Committee's Consumer Affairs, Product Safety and Insurance Subcommittee, Sen. Mark Pryor, D-Ark. In his opening remarks, Sen. Pryor noted that no insurer or insurance company trade group chose to testify.

Although Sen. Pryor suggested this was because no industry representative wanted to occupy the unfortunate position of being a target for Sen. Lott, a senior insurance trade group lobbyist said that was not the case.

The lobbyist–who asked not to be named out of concern for congressional retaliation–noted that a number of insurance trade groups testified at the Banking Committee hearing, which generally has jurisdiction over insurance matters.

“Historically, the Senate Banking Committee has claimed primacy over insurance issues,” the lobbyist said, “and participating in a hearing being held at the same time by another committee would, the industry felt, be considered 'insulting' by Sens. Dodd and Shelby.”

At the Banking Committee hearing, supporters of a federal catastrophe program argued that insurers are already failing to provide adequate protection for many homeowners, and that taxpayers are already bearing the brunt of costs in the wake of a major storm–citing the billions of public dollars that have been spent on recovery in New Orleans and along the Gulf Coast.

“The long and the short of what is facing us is that the big one is coming,” said Sen. Bill Nelson, D-Fla., a former insurance commissioner who appeared before the committee as a witness. He added that Katrina was only a Category 3 storm–noting that a Category 4 or 5 storm, or an earthquake in San Francisco or Memphis, could have far more of an impact.

“And when the big one hits,” he said, “just like with Katrina, the federal government is going to pick up the tab.”

Sen. Mel Martinez, R-Fla., said the question facing policymakers was not if a major storm would strike, but when. “We dodged a bullet last year,” he said, “but asking for another year without a major hurricane is like betting against the house.”

A major storm could overwhelm the insurance market, according to James Loy, a former Coast Guard admiral and current national co-chair of ProtectingAmerica.org, a coalition that is promoting a national catastrophe fund program.

A replay of the 1906 San Francisco earthquake this year, he said, could cause as much as $400 billion in damages, and the “Long Island Express” Hurricane that struck in 1938 would cause over $100 billion in today's world.

Under the ProtectingAmerica.org proposal, insurers would set up catastrophe funds at the state level, backed up by a federal facility. “Much like the 401(k) retirement savings program, these cat funds would grow tax-free, thus able to generate higher levels of reserves to provide greater levels of coverage in a shorter timeframe.”

Florida Gov. Charlie Crist testified that a federal catastrophe fund would be a better use of public money because it would work on a proactive basis to help mitigate against damages, and would ease the overall burden on taxpayers nationwide.

As an example, Gov. Crist noted estimates that the Great Lakes and Plains states will contribute roughly $26 billion in Katrina-related programs. “However, these tax dollars are not risk-based, and they will leave little legacy that guarantees relief for the next natural catastrophe, regardless of where it strikes,” he said.

Gov. Crist also corrected a statement by Sen. Richard Shelby, R-Ala., the ranking minority member of the committee, that Florida's own catastrophe fund has only $1 billion available to pay for losses. “We have the ability to pay $9 billion,” he said.

Witnesses representing the insurance industry criticized the national catastrophe fund proposal and argued that Florida's fund does not provide the relief for taxpayers that it appears to. “Most of the savings are illusory,” according to Robert P. Hartwig, president of the Insurance Information Institute.

The Florida fund operates by selling reinsurance backed by the state at a reduced price to primary companies. In the event it pays out for losses beyond its reserves after a major event, Mr. Hartwig noted the fund would largely cover its expenses through assessments on policyholders.

Noting another of the examples of Mr. Loy, Mr. Hartwig said an occurrence equal to the 1926 hurricane that struck Miami would result in a $40 billion assessment against Florida policyholders.

Frank Nutter, president of the Reinsurance Association of America, said the assessments would affect all policyholders in the state under a law passed by the Florida Legislature in an emergency session in January.

“The effect is that insurers have off-loaded a substantial part of their property risk to a government catastrophe fund, and that government fund will assess its citizens to make up for the revenue shortfall caused by the 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.”

Sen. Dodd expressed support for increasing funding in the federal budget for mitigation programs, as well as a short-term tax deduction to help homeowners pay insurance premiums in areas where prices have risen most dramatically. He also called for reforming the National Flood Insurance Program through legislation that had been passed by the committee last year.

For a more permanent solution, however, Sen. Dodd said the issue would need to be studied in greater detail. “I believe we ought to establish a short-term commission of insurance experts and other leaders to make recommendations to Congress in short order” before going forward with any particular proposal, he said.

While Sen. Dodd seemed willing to leave the door open for a national catastrophe fund once a study commission has completed its work, Sen. Shelby was far more skeptical, often citing the problems facing the NFIP as reason for the government to stay away from the insurance business–or any public/private partnerships.

Such arrangements, he said, “usually involve a lot of public money, a lot of private profit and very little partnership.”

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