Mega-Catastrophe Losses Top State Regulatory Agenda

Coming to grips with mega-catastrophe risks is at the top of the insurance agenda for state lawmakers and regulators in 2006 in the wake of back-to-back years of massive hurricane losses.

Commissioners from two of the most catastrophe-prone states–California and Florida–kicked off a national debate in November with a controversial proposal that would require property insurers to cover all natural risks, including flood, in return for a state and federal backstop in the event of mega-losses.

Regulators and industry representatives both took a wait-and-see attitude at the National Association of Insurance Commissioners winter meeting last month.

The newly-installed NAIC president, Maine Insurance Commissioner Alessandro Iuppa, said the plan is worth looking into, but would go no further than that. “We at the NAIC are the technical experts, so we have a role there, and the topic is certainly timely,” he said.

Florida Insurance Commissioner Kevin McCarty said he hopes for some NAIC action at the group's next meeting in March.

Mega-catastrophe risk coverage is a multifaceted issue with both economic and political components, according to Joseph Annotti, senior vice president at the Property Casualty Insurers Association of America. “We are currently determining a policy position on this issue, and when consensus is achieved, we will advocate aggressively for our members,” he said.

However, with strong public positions on opposite ends of the spectrum taken by two of PCI's leading members–Allstate and Liberty Mutual–reaching that consensus will be a challenge.

Meanwhile, the American Insurance Association has come down firmly against the plan–particularly its proposed government backstops. “We will be advocating that policymakers establish or maintain proper incentives for private-market insurance participation in catastrophe-prone states, including mitigation improvement,” said an AIA representative, Brenda O'Connor.

In Florida, the AIA will work to strengthen both the state catastrophe fund and the high-risk exposures faced by the state's residual market, Citizens Property Insurance Corp., Ms. O'Connor added.

If insurers do take on flood risk, it will involve a major revamping of the National Flood Insurance Program. That new burden could also be propelled by the “wind versus water” lawsuits challenging the industry's longstanding flood exclusion, which Mr. Annotti said are adding a new dimension to the debate. (See related story on page 12.)

“We would like to see the NFIP be required to operate in a more fiscally responsible manner, and one that discourages continued construction in areas susceptible to repeated catastrophic flooding,” said Mr. Annotti.

Susan Nolan, executive director of the National Conference of Insurance Legislators, said her organization will look into backing a private-public approach to natural catastrophe risk. “Legislators will also pursue state enactment and enforcement of effective building codes in order to reduce catastrophic losses and lower policyholder premiums,” she noted.

In addition to his NAIC role, Mr. Iuppa also serves in a similar capacity at the International Association of Insurance Supervisors. As such, he can keep a close eye on new global accounting and solvency standards that in the end might become part of the U.S. canon. The amount of progress in those two areas could determine whether the NAIC decides to tackle the thorny issue of alien reinsurer collateralization.

Mr. Iuppa said the question of lowering the current 100 percent collateral requirements will top the agenda at the commissioners' organizational meeting in February. The NAIC recently approved a white paper setting the terms of the debate, which went on a two-year hiatus while the main antagonists–the alien reinsurers and the domestic insurance industry–attempted unsuccessfully to reach a compromise solution.

Nationalization of insurance regulations will continue to occupy the energies of regulators, lawmakers and insurers this year. The main stage will be in Washington, where House members will look at federal preemption legislation known as the State Modernization and Regulatory Transparency (SMART) Act, which would set federal standards for state insurance regulation.

However, there should be plenty of action in the statehouses, particularly in Massachusetts, where lawmakers are attempting to modify the “fix and establish” rating system for personal lines. “Massachusetts will be a key battleground as insurers attempt to introduce a more competitive system to a state whose auto insurance ratings practices closely resemble that of the old Soviet Union,” according to Mr. Annotti of PCI.

Ms. O'Connor said AIA will continue pressing for further reforms to New York's no-fault system in 2006, as well as reauthorization of the state's flex-rating plans. “In other states we will work to support the sunset of Florida's no-fault law and a transition to a tort system, and continue efforts to manage Colorado's similar 2003 transition to a tort system from no-fault,” he said.

Producers will have their own agenda in 2006. Wes Bissett, senior vice president of the Independent Insurance Agents and Brokers of America, said meaningful licensing reform remains at the top of his group's agenda. “One of our key objectives is to address requirements in many states that force an agent to obtain three licenses–individual, entity and corporate registration–before any business can be written in a particular jurisdiction,” he noted.

The IIABA will continue to oppose the NAIC fingerprint repository project. “If they go ahead with it, it is likely that some states will consider legislation that would prohibit insurance departments from sharing fingerprints with entities like the NAIC,” Mr. Bissett said.

For the Council of Insurance Agents and Brokers, building on this year's success in “clearing the table of awful protectionist state countersignature statues” will keep the group's government affairs representatives occupied. “Our next priority is using the same legal theory–eliminating obvious barriers to free and open competition–and apply it against the morass of state surplus lines laws,” noted Joel Wood, CIAB's senior vice president for government affairs.

Looking to create a permanent coverage solution for terrorism exposures that includes some federal intervention to create a market for the controversial risk will also remain a top priority–and a fairly daunting one at that, CIAB noted.

“Having just gone through the bruising and ugly TRIA extension debate, nobody in Congress really wants to hear from us on that issue for the time being, and I'd sort of not like to have to think about it myself,” Mr. Wood said.