Lobbyists See Charley As Argument For TRIA

With that number in hand some lobbyists are even planning to push for stronger congressional support for various catastrophe reinsurance and reserve programs the industry has been urging officials in Washington, D.C. to support for many years.

Lehman Bros. analyst Chris Winans said the estimated loss of $5-to-$10 billion was not "a material event for the industry," and Morgan Stanley analyst William Wilt said the storm was "unfortunate, but not unexpected."

But insurance advocates say that for an industry stunned by 9/11 and hit repeatedly by natural catastrophes large and small, it illustrates that even the larger capacity that has been built into the system over the last several years can be consumed quickly in the wake of a major event.

Charley, even though the ultimate cost is likely to be modest, "is going to cost us a fair amount of capacity, and already leery reinsurers may run away from the U.S. even more," lamented a top official of one larger insurer in urging industry lobbyists to use Charley to make a strong case in Congress for renewing TRIA this year.

What particularly galls the industry are comments by former Texas Insurance Commissioner Robert Hunter and others that insurers have lots of capital/surplus sitting around to respond to terrorism and therefore don't need TRIA extended. "What he's deliberately ignoring is the fact that this capital/surplus is also used to pay other claims that come in the door, such as those from hurricanes," an insurance official said.

Joseph Annotti, vice president for public affairs at the Property Casualty Insurers Association of America, agreed. "I think what Mr. Hunter and the other opponents of the TRIA extension fail to see is that reserves are not set aside specifically to pay for terrorism, they are set aside to pay for losses like Charley, like the hailstorms that plague Texas and the Midwest, as well as tornadoes and other events."

Lobbyists for insurers are pushing for congressional extension on TRIA this year even though the legislation doesn't expire until Dec. 31, 2005, because it leaves insurers potentially on the hook for terrorism coverage for commercial policies written far into 2005 that expire sometime in 2006.

What state regulators do next year in mandating that insurers cover terrorism in existing policies written in 2005 that expire in 2006 if TRIA is not extended will also be a factor in insurers' decisions.

As Mr. Winans said in his note to investors last week on losses from Charley, one impact of the low cost is that it would "harden the market for property catastrophe reinsurance, as that subsegment of the industry remains overcapitalized."

As the industry goes into talks with Congress over extension of TRIA this fall, one other comment by Mr. Winans would also seem important: the industry's strong credibility in predicting the cost of disasters.

"It may seem counterintuitive that a $5 billion loss could be so non-threatening to the industry's capital case, but much has changed since Andrew struck in 1992," Mr. Winans said. "At that time, Florida had no CAT fund, let alone 12 years between events to bankroll such a facility with industry premiums. Also, the Andrew experience spawned an industry of catastrophe modelers that have grown increasingly sophisticated in their ability to identify and accurately quantify CAT risk."

As a result, Mr. Winans said in his note, "insurers and reinsurers today are far better at setting appropriate rates and coverage terms. In short, we think Charley is the acid test for whether all these post-Andrew changes are effective. So far, it appears to us that the industry will pass this test by a wide margin."

Mr. Winans said that part of the reason losses for covered companies were insignificant is
the reinsurance provided by the Florida Hurricane
Catastrophe Fund. Florida created the FHCF in 1993 after Hurricane Andrew dealt the state $15.5 billion in insured losses in order to improve the availability and affordability of residential
property insurance in the state.

Insurers pay a premium each year to the fund based on their potential exposure to hurricanes in the state and are reinsured for losses above a certain deductible that depends on the premiums the insurer pays into the fund each year, Mr. Winans said.