Labor Day–the traditional end-of-summer respite for Americans–falls right in between two troubling anniversaries for insurers and society at large. One year ago last Tuesday, Hurricane Katrina ripped through New Orleans, causing record losses, while five years ago next Monday, the nation suffered its deadliest and most costly attack when terrorists in jets took down both towers of New York's World Trade Center. The forces of nature and of jihad might seem to have little in common, but for the property-casualty industry, the lack of a reliable backstop, private or public, for such losses is a critical connection.
Over the past five years, regulators, lawmakers and p-c executives have struggled to come up with mechanisms that would preserve the nation's insurance industry in the aftermath of natural or man-made catastrophes.
One main difference is the fact that while the industry is united on the need for a terrorism risk backstop, it is speaking with anything but one voice when it comes to creating a facility for natural catastrophes.
Allstate started the catastrophe fund bandwagon rolling last fall following its massive Katrina loss. But while other big companies might support the concept in theory, no one except the largest publicly-traded personal lines company has gone to such lengths to secure its fruition–including the backing of an advocacy group headed by former Federal Emergency Management Agency chief James Lee Witt.
A ProtectingAmerica.org representative, Pete McDonough, said Congress has moved forward in bringing these funds into reality. "The fact that bills already have been introduced in both houses in Congress and hearings have already been held in the House was evidence of an urgency on the part of the lawmakers to get something done in the field," he said.
Robert Hartwig, executive vice president and chief economist for the Insurance Information Institute in New York, agreed the national catastrophe plan idea has gained some traction in Washington, without detracting from the effort to create a permanent terrorism-risk backstop.
"I think the industry wants to keep these issues totally separate," said Mr. Hartwig. In fact, about the only note of insurance-related acrimony so far in the general Katrina anniversary commemorations have been the shots taken at the American Insurance Association for its anti-fund stance.
The p-c industry faces the 2006 hurricane season with some trepidation, but also from a position of surplus strength, as years of rate increases following the Sept. 11 attacks have provided a substantial cushion. Despite nearly $58 billion in insured losses, the industry earned $43 billion in profits last year, according to figures compiled by the Insurance Services Office and the Property Casualty Insurers Association of America.
"Insurers have been able to bolster their policyholders' surplus, or their claims-paying capacity, and that means the industry will be able to withstand another 2005 [hurricane] season this year or even worse," Mr. Hartwig noted.
Insurer investments in technology and training over the past two years have not only helped financially but also set the stage for better claims services, "to get the right people at the right place at the right time to help out policyholders," he added.
"There are always lessons learned. The infrastructure in some areas was inaccessible and policyholders were no longer in residence [after Hurricane Katrina], so insurers have purchased more catastrophe vehicles," Mr. Hartwig said.
However, with reinsurers cutting back on peak exposure underwriting, primary companies would be forced to take a bigger bite of any losses ahead for this year.
Standard & Poor's analyst Thomas Upton said reinsurers' overall risk management steps should generate an easier 2006 for the secondary market if Mother Nature provides a repeat of last year.
Unfortunately, the same can't necessarily be said for certain segments of the primary insurance industry–with reinsurance rates doubling, if coverage is available at all. "The most vulnerable companies will be those in any localized Atlantic Basin coastal areas, from the Gulf Coast all the way up to Massachusetts," warned Mr. Upton.
The Insurance Information Institute reports that 95 percent of homeowners' claims have been settled from Katrina, and that homeowners' insurers will ultimately pay one million homeowners some $16 billion in compensation. Moreover, the vast majority of homeowners say they are satisfied with their insurance companies.
Such figures belie the steady drumbeat of news reports and "wind versus flood" lawsuits that would seem to indicate widespread anger at the insurance industry, Mr. Hartwig said.
However, while the industry claimed victory in the first such lawsuit last month in a case against Nationwide, indications are that even a string of similar legal wins will not obviate the need for some reform in the market, as more uninsured homeowners attempt to rebuild after hurricanes.
While the industry has rejected out of hand an "all-perils" policy proposal to replace the current public-private formula for underwriting hurricane and flood risks, the fact that half of homeowners in high-risk areas are without federal flood insurance remains a critical problem in search of a solution, according to David Maurstad, administrator of the National Flood Insurance Program.
NFIP reform stands at the top of the legislative agenda for the industry, federal lawmakers and state regulators. Among the changes sought by the AIA and other groups are more actuarially sound premiums, increases in maximum coverage and deductibles, as well as completion of the map modernization program for sounder underwriting.
That is only the beginning, for reform measures must not only come from Congress but also numerous state legislatures such as in Florida, where Gov. Jeb Bush is considering a special session this fall if it appears consensus is ripe on corrective measures.
If the recent parade in Key West, Fla., held to celebrate the state-run insurer failing to get its full rate hike is any indication, the debate will be anything but dull and its outcome anything but certain.
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