The accuracy of an insurance industry-sponsored study by a consulting firm concluding that the cost of adding windstorm coverage to the National Flood Insurance Program is potentially astronomical has generated an intense storm of its own.

In response, the policy director for the member of Congress who introduced the idea reacted with outrage. "Wow. You really cooked the books on that one. Are there no professional standards in the actuarial industry?" asked Brian Martin, policy director for Rep. Gene Taylor, D-Miss.

He made his comment in an e-mail obtained by the National Underwriter that was directed to a lobbyist for the American Insurance Association, which commissioned the study by Towers Perrin Tillinghast.

It is Rep. Taylor's legislation--H.R. 920--calling for the NFIP to provide all-perils coverage that spurred the report and e-mail. Rep. Taylor in January settled his own suit against State Farm for Hurricane Katrina damages.

In his e-mail, Mr. Martin suggested that Towers Perrin drew its conclusions based on faulty assumptions it made about the program's scope if windstorm is added.

He said Towers Perrin assumed that wind premiums would be set 20 percent lower than annual loss estimates would require. "I assume we would use RMS or other risk models' annual loss estimates to set premiums," he said in the e-mail. "There, I solved the problem."

Mr. Martin added that in its analysis, to "further cook the numbers," Towers Perrin projects what would happen if the new program captured 100 percent of the wind market with the 20 percent discount in premiums, or captured the highest-risk 20 percent of the market but did not charge higher premiums in high-risk areas than they would have charged in low-risk areas.

"Neither of those scenarios is even possible under the bill, much less likely," he said. "Why not ask for an honest assessment of the bill?"

The study was commissioned by AIA in preparation for a July 17 hearing on Rep. Taylor's bill before the Housing Subcommittee of the Financial Services Committee. Copies were sent to the leadership of both the House subcommittee and its parent by AIA President Mark Racicot, the former governor of Montana.

The study reported that in some scenarios, if windstorm were added as a covered peril, "deficits from catastrophic wind events to the NFIP in a single year could be $100 billion to $200 billion, or potentially even higher."

In response, Mr. Martin in his e-mail said, "I am embarrassed for Towers Perrin and for Gov. Racicot that they would put their names on such a ridiculous report."

"What we are proposing is not radical," Mr. Martin said. "Your members already are dropping millions of policyholders and enrolling them in state wind pools and other state-sponsored residual markets. It really is not rocket science to add wind coverage to flood coverage in hurricane-risk areas in a fiscally responsible manner."

In response to Mr. Martin's e-mail, Stephen Lowe, managing director of the p-c consulting practice at Towers Perrin, said he was "taken aback by the tone of Mr. Martin's comments...Our work was prepared within actuarial standards, and we certainly stand by the work."

An AIA representative, Dennis Kelly, said, "We respectfully disagree [with Mr. Martin's comments] and hope the analysis is part of the discussion at the hearing."

Mr. Kelly added that the actuarial analysis by Towers Perrin "necessarily made assumptions about the operation of the proposed program, and those assumptions were based on a careful observation of the private property insurance market in coastal states."

He said "experience with the NFIP, as was recently confirmed by the Congressional Budget Office, is that legislation requiring that rates for a federal insurance program be based on actuarial principles does not guarantee rate adequacy."

The July 17 hearing will be chaired by Rep. Maxine Waters, D-Calif. The letter was addressed to Rep. Waters; Judy Biggert, R-Ill., ranking minority member of the subcommittee; Rep. Barney Frank, committee chairman; and Rep. Spencer Bachus, R-Ala., ranking minority member of the full committee.

"In our view, the results are troubling, especially to those who are concerned about the ultimate costs of an expanded program to our nation's taxpayers," Mr. Racicot said in a letter to the House panel.

He added that the deficits from adding windstorm coverage to the program "are likely to be even higher than those specified in the analysis due to expected new coastal construction and inflation."

He also voiced concern that the deficit would be even greater if the program attracts a disproportionate number of high-risk policyholders--as is often the case with government insurance programs.

This would occur, he said, even though the law establishing the program requires that premiums be based on "actuarial principles."

Mr. Racicot acknowledged that the property insurance market currently is "under stress" in several Atlantic and Gulf Coast states. But the solution, he said, "rests in improving, not displacing, private-sector ability to serve homeowners and businesses in the path of potential storms."

To this end, he said, AIA has developed a proactive agenda that includes protective measures, legal reforms and regulatory reforms at the state and federal level. "We oppose the creation of hurricane 'cat funds' and other government programs that ultimately result in a bailout from taxpayers living in less-risky areas," he added.

The bill at issue was proposed by Rep. Taylor in response to what he sees as unfair practices by insurers in adjusting claims in the wake of Hurricane Katrina.

Because insurers adjust claims for both their wind policies and the flood policies they administer under the NFIP's Write-Your-Own program, Rep. Taylor has alleged that insurers intentionally attributed an unfair share of the damages to flooding, which is paid for by the federal government, rather than to wind damages that would be included in their own policies.

The legislation has supporters on both sides of the aisle, including Rep. Waters and Rep. Bobby Jindal, R-La., who is running for governor of Louisiana.

Special Reports /

AIA Report On NFIP Expansion Into Wind Prompts Huge Brouhaha

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