Mega-Risk Approach Gets Mixed Review

The record catastrophe losses of 2005, along with the down-to-the wire battle to extend the Terrorism Risk Insurance Act, have prompted state lawmakers and regulators to think big in terms of an overall approach to mega-catastrophe coverage. However, so far there seems little appetite for a mechanism that would combine protection from both man-made and natural catastrophes.

The week of Nov. 14-19 started with a call by a group of state commissioners–led by California's John Garamendi–to create a public-private, three-layered approach that calls for state and federal backstops with deductions and attachments points left tentative at this point.

Ultimately, the plan proposes elimination of the National Flood Insurance Program and the creation of an all-perils policy to replace traditional homeowners' coverage.

The two-day National Catastrophe Insurance Summit in Burlingame, Calif., actually began with an approach that seemed to embrace coverage for both man-made and natural events, but in the end it settled on a plan that focused on protecting homeowners and renters from natural catastrophes.

The week concluded with the National Conference of Insurance Legislators embracing the more limited approach at its annual meeting in San Diego.

State Sen. Steve Geller, D-Hallandale Beach, Fla., and State Rep. Craig Eiland, D-Galveston–former NCOIL presidents, as well as representatives from the catastrophe-prone states–attended the catastrophe summit and liked what they saw. In fact, Sen. Geller said he thought that NCOIL might rework its own catastrophe plan adopted last year to keep it more in line with the approach discussed at the summit.

That layered approach would call for each state to create something akin to the Florida Catastrophe Fund, with the ability to assess carriers and ultimately policyholders for catastrophe protection.

Challenges Ahead

Summit players did not underestimate the challenges ahead. New York Insurance Superintendent Howard Mills noted the difficulty in his state of starting such a fund due to intra-state concerns that it would only benefit downstate, hurricane-prone areas.

However, Texas Rep. Eiland did not anticipate much resistance at the state level. "It is Congress where we are going to have problems," he predicted.

NCOIL's incoming president–North Dakota Rep. Frank Wald, R-Dickinson–said his state's residents benefit greatly from federal largess in the form of farm subsidies and would not be averse to seemingly having to fund coastal catastrophe losses.

Mr. Garamendi, nonetheless, recognized it might be a tough sell in the states and hesitated as to whether he would eventually seek full endorsement by the National Association of Insurance Commissioners when he proposes the plan at the NAIC's winter meeting next month in Chicago.

"On something as controversial as this, it will always be difficult to gain unanimity," he said. Mr. Garamendi also asserted that some mechanism would have to be developed for those states that choose not to participate in the program.

At least Florida is on board, playing its traditional part in urging a federal role in catastrophe risk protection. Two Florida congressional representatives introduced a measure in the aftermath of the summit calling for such a nationwide catastrophe fund and the creation of counterparts at the state level. In previous years, Rep. Mark Foley, R-Florida, has introduced legislation calling for tax-deferred pre-loss reserving, but has found little appetite for the measure with his colleagues.

Robert Litan, a Brookings Institute senior fellow, echoed others who said that the less than enthusiastic embrace by Congress of a backstop for terrorism risk did not bode well for passage of one for natural catastrophe exposures.

The summit itself prompted some grumbling as to its invitation-only nature and the last-minute role the NAIC played in backing it financially. The top regulators from California, Illinois, Florida and New York sponsored the event, which was in the works before Hurricanes Katrina and Rita. "I would like to thank the NAIC for treating us so graciously after being bludgeoned into letting us attend," said Sen. Geller.

Allstate and State Farm played a prominent role in the event, but for the most part participation was limited to regulators and experts in the field of risk modeling.

At the NCOIL meeting, state lawmakers expressed concern about the insurance industry view on state and federal backstops for natural catastrophe coverage and got a mixed response.

A representative from the American Insurance Association said that the private market was capable of handling any foreseeable natural event now. However, her counterparts from the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies–groups in which leading homeowner carriers Allstate and State Farm play a prominent role—said their member companies' positions were in flux at this point in the aftermath of Katrina.

Mr. Garamendi framed the summit's call for an all-perils policy that would in theory preclude the huge federal giveaways which have evidenced themselves in New Orleans. For the consumer, there would be protection, for example, for the estimated 85 percent of California residents without earthquake insurance and more than half of Gulf Coast areas without flood insurance. In turn, the industry would gain limits on exposure for providing blanket all-perils protection.

But Franklin Nutter, president of the Reinsurance Association of America–a group consistently opposed to government catastrophe funds–asserted that most of the post-Katrina aid went to immediate disaster relief and infrastructure repair, and not to homeowners without insurance coverage.

Both the lawmakers and regulators gave little thought to a permanent market solution for terrorism risk once the latest proposed TRIA extension expires in two years.

Julie Gackenback, PCI's Washington lobbyist, said the industry has come up with a 12-year transition period in which companies could purchase terrorism reinsurance backed on a decreasing basis by the federal government. She said that Rep. Tom DeLay, R-Texas, requested the proposal last August, but since that time he has lost his leadership post in the aftermath of his indictment in connection with campaign finance abuse charges.

Sidebar:

Flag: Breakdown

Head: What's In The Plan?

The system advocated by California Insurance Commissioner John Garamendi would have the following components:

o Homeowners, condominium or renters policies provided by insurers would be all-perils coverage, excluding terrorism risk. The policies would cover floods, fires, earthquakes and tsunamis.

o A public-private partnership would have insurers provide the initial homeowners policy with a limited exposure, capped at some dollar amount.

o Beyond the cap, coverage from a state facility would kick in.

o Above that second level of coverage, a federal backstop would kick in.

o There would be a heavy mitigation program.