State, Federal Lawmakers At Odds Over Lessons From Hurricane Katrina

Insurance commissioners from Alabama, Florida, Louisiana, Mississippi and Texas spoke about the problems facing consumers and their particular states in the wake of the monster storm at an informal hearing of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. Up for discussion were actions that have and still could be taken to help limit losses in the event of a major future catastrophe.

Subcommittee Chairman Richard Baker, R-La., questioned the commissioners if the storm had brought a sense of urgency to efforts to establish uniform claims regulations and resolution processes between the states–at least among those along the Gulf Coast.

In response, Mississippi Insurance Commissioner George Dale acknowledged that "we have got to work better between the states" on these issues, although he added that some work is being done at the moment through the National Association of Insurance Commissioners.

However, when Mr. Dale noted that the NAIC has helped states work together since its founding in the late 1800s, Rep. Baker quipped that "it seems like we're working off those same documents from the 1800s," adding that he expected "more of a sense of urgency along the Gulf Coast."

Rep. Baker also questioned whether the states had considered joining together in a form of risk-sharing pool, but Louisiana Insurance Commissioner J. Robert Wooley explained that another major factor–politics–has a damping effect on such cooperative efforts.

Florida, he said, already has established a catastrophe fund, which prior to Hurricane Wilma at least had been relatively well funded. It would be especially difficult, he said, to convince Florida citizens that the money they have contributed to their fund should be used to help limit the risk for homeowners in Alabama or any other state.

"Nobody wants to pay for anybody else," he said, adding that such a system would be even more difficult to establish nationwide. "Nobody in Montana wants to pay more to help keep insurance rates down along the Gulf Coast."

Rep. Paul Kanjorski, D-Penn., added that establishing a national program will grow even more difficult the further into the past Katrina fades, noting what he called the "loss of sympathy over time."

However, the commissioners noted that the federal government could play a role in helping to keep insurance available for those living in vulnerable areas. "We certainly would advocate a federal backstop," Florida Insurance Commissioner Kevin McCarty said in response to a question from Rep. Carolyn Maloney, D-N.Y.

Rep. Maloney had questioned whether the federal government could create a program to provide a reinsurance backstop for natural catastrophes along the lines of the federal Terrorism Risk Insurance Act and legislation introduced by former Congressman Rick Lazio, R-N.Y., that she said, "I'm thinking of reintroducing."

Mr. McCarty also called on lawmakers to allow for insurers to accumulate tax-deferred catastrophe reserves. If companies had been allowed to do so after Hurricane Andrew a decade ago, he estimated they would have built up between $20- and $30 billion in reserves by this time.

Much of the discussion at the hearing also focused on the role the federal government is already playing through the National Flood Insurance Program.

Rep. Baker questioned Mr. Dale over his state's attempt to force insurers to cover flood damage, even though such damages are specifically excluded from homeowners' policies and no premiums were collected for such coverage. Mr. Dale acknowledged that doing so would affect company reserves and that the state "fumbled the ball somewhat."

However, he added that the state's action was the result of "too much confusion" over what parts of damages were covered by a homeowners' policy and what weren't.

The commissioners noted that one of the side effects of the NFIP–which does not charge actuarially determined premiums–is that it has in effect encouraged people to live in vulnerable areas.

However, the notion of moving the NFIP toward a more risk-based system also raised concerns. Rep. Artur Davis, D-Ala., noted that if it allowed a risk-based system, Congress would effectively be deciding which communities along the Gulf Coast should be rebuilt and which shouldn't–a decision he said would be better made at the local level.

Mr. McCarty countered, however, that "Congress already decided what areas to build in by establishing the National Flood Insurance Program."

Rep. Davis also questioned the commissioners whether, if the NFIP were eliminated, the private insurance market would step in to fill the gap. In response, Alabama Insurance Commissioner Walter Bell noted that, "to be able to do that, there would have to be a federal backstop of some sort," or else coverage would be simply unaffordable in some areas.

Another action the commissioners touched upon to ease the vulnerability to future catastrophes is the establishment of uniform, comprehensive building codes. Mr. Bell said that as he was moving through the affected areas, he could tell which buildings had been built since more comprehensive codes had been implemented because they were far less damaged.

Mr. Wooley said the issue has been raised in Louisiana and will be tackled by the legislature in its next session. "I think it's the responsible thing to do," he said.

Infographic, with storm damage photo?:

Flag: Brainstorming

Head: What Are The Alternatives?

To be better prepared to mitigate and cover future catastrophe losses, a number of options were cited, with varying degrees of support among state and federal lawmakers.

o States could establish uniform claims regulations and resolution processes.

o States could join together to create a risk-sharing pool.

o Stonger, uniform, comprehensive building codes could be established.

o Congress could provide a reinsurance backstop for natural catastrophes along the lines of the federal Terrorism Risk Insurance Act.

o Congress could allow insurers to accumulate tax-deferred catastrophe reserves.

o The National Flood Insurance Program could charge actuarially determined premiums.

o The NFIP could be eliminated, with the private insurance market stepping in to fill the gap–perhaps with a federal backstop.