Mr. Friedman Goes To Washington

Last week's posting from my visit to Capitol Hill for the first of what promises to be many Congressional hearings about insurer handling of Hurricane Katrina claims only scratched the surface of what was discussed during that long afternoon for an industry on the hot seat. Read on for some more highlights (or lowlights, depending on your perspective).

–Rep. Gene Taylor, D-Miss., used the forum to plug his plan to allow the National Flood Insurance Program to write an all-perils policy. “If insurers are going to systematically pull out of coastal areas…has a vacuum been created that the government should fill like it did before by creating the NFIP?” he asked.

My answer would be, absolutely not! Look how poorly the feds run the NFIP! Why in the world would you want them to expand their coverage? A more productive discussion might be whether all homeowners policies should offer all-peril coverage–but only at actuarially-sound rates, please!

–The industry's sole witness at the hearing, Insurance Information Institute President Bob Hartwig, tried to provide a reality check to those who would bury the industry and then beg carriers to write their exposures. After observing that “misguided” lawsuits and legislation were making property risks “intolerable” for insurers in catastrophe-prone states, he warned that additional regulation, legislation and litigation could deliver “a potentially lethal blow” to the market's viability.

Will lawmakers listen? I doubt it.

–Rep. Peter Roskam, R-Ill., asked Mississippi Attorney General Jim Hood a good question: “How do you void exclusions and then expect companies to write in your state?” He said that forcing payment of claims for flood losses not covered in policies “may win in the short run,” but over the longer haul, “the company says the state is too high maintenance, we can't get a fair shake, and they treat our policies like it's an Etch-A-Sketch and rewrite them,” prompting them to walk.

Mr. Hood responded that he struck a settlement with State Farm on a class-action suit and agreed to call off the dogs by dropping his grand jury probe of the carrier's claims practices to keep the insurer in the state–only to see them stop writing new business, which he feels is some sort of betrayal.

But I can't see what other choice State Farm had. It already is too heavily exposed, with about one-third of the disaster-prone Mississippi market. Insurers on Long Island, N.Y., are taking similar precautions, with some going to far as to nonrenew policyholders. (Rep. Carolyn McCarthy, D-N.Y., lamented that “it's obscene, what insurers are doing” in pulling out of coastal New York areas.) It's not pleasant, but it's a necessary response to balance a carrier's risk portfolio.

–When asked by Rep. Gary G. Miller, R-Calif., why Congress should get involved with a local insurance problem, Mr. Hood's response was that insurers can blackmail states–pressuring lawmakers by threatening to withdraw their capital. He indicated that insurers would be less likely to successfully coerce Congress, since carriers would have nowhere to run if they were federally-regulated.

But aren't states also guilty of “blackmail,” by threatening to cancel all of a carrier's licenses if they don't write an overly risky exposure? Haven't states for years denied carriers risk-based rates in auto and homeowners insurance, as well as other lines? This kind of leverage seems to go both ways.

–Perhaps the most telling point made by industry critics at the hearing dealt with the cockamamie way we handle flood insurance in this country. By outsourcing administration of federal flood program sales and claims to private carriers, Uncle Sam certainly has left the system open to potential conflicts of interest and abuse, don't you think?

Is the answer to add on a new federal adjusting department? Have independent adjusters work for the federal government directly on flood claims? Or fold flood into standard homeowners policies? You tell me.