Conceding that "the stars have lined up to give us some very difficult challenges," Alex Soto, president of the Independent Insurance Agents and Brokers of America, has set his sights on two legislative targets critical to the industry–disaster coverage and regulatory reform. Mr. Soto, just past the halfway point of his one-year administration, outlines his goals and vision in an exclusive interview with National Underwriter.
"We can go two ways on catastrophe management," he said during a recent interview in Washington, D.C., right before a major Congressional hearing on the industry's claims-handling performance in Hurricane Katrina. "We can keep going as we've been–just addressing disasters as they occur, waiting for the [federal] cavalry to arrive for the rescue. Or we could be more proactive and fund for these catastrophes before they hit."
Mr. Soto believes that "ultimately, from a political standpoint, we need a federal reinsurance facility for hurricanes, earthquakes and other disasters–perhaps building on the system in place for terrorism."
Under his vision, the federal government would sell reinsurance to state funds and private carriers "at actuarially sound but economically feasible rates–which is not mutually exclusive."
He said while he is sensitive to the balance needed so that his plan would not undermine the private reinsurance market, "the fact is that coverage is not always available–especially in disaster-prone areas. So the question should be at what point is it appropriate for the federal government to have a role–be it for a massive catastrophe or multiple disasters? The idea is to come up with something."
As president of InSource, a Miami-based agency, Mr. Soto is keenly aware of the pressures facing producers struggling to find affordable coverage–or any insurance at all–for residential and commercial property owners in catastrophe-exposed states such as his own Florida backyard.
Mr. Soto said he would prefer a coordinated, national approach, rather than letting vulnerable regions fend for themselves. "With states like mine down in Florida setting up state funds on their own and selling reinsurance at cut-rate prices, we are in effect laying on the poker table the economic well-being of every citizen of Florida," he said.
In addition, with hurricanes becoming more prevalent and powerful, and causing storm-surge losses, "it's time to consider putting flood risks back into the homeowners insurance policy–but with the federal government as reinsurer, and with people paying what's appropriate to cover the risk they face," according to Mr. Soto. "The way the system works now, with flood sold separately, it's just not working."
Mr. Soto acknowledges that those in areas less prone to flood would naturally balk at this suggestion, but believes a compromise could be worked out to benefit the country as a whole.
"If you bring everyone into the program, I know people will complain that 'I'm from Iowa, or Kansas, and I don't want flood coverage,'" he said. "But that won't matter if the guy in Iowa only pays a nickle, or maybe nothing [for flood coverage], while the guy in flood-prone spots pay their fair share."
He added, "What's important here is not to bring the guy in from Iowa, but to bring in those who do have the exposure but don't know it, or mistakenly think they're already covered under their homeowners policy, or who ignore the risk."
Ideally, according to Mr. Soto, all homeowners insurers would sell flood coverage–not just those who volunteer to be a "Write Your Own" carrier under the National Flood Insurance Program. "I would take the flood cover and make it mandatory, but the federal government would still be the risk-taker and would set the rate," he said.
Such a plan would be preferable to suggestions by some in Congress to simply add wind and other risks into NFIP's standalone flood coverage. "I don't want the federal government to get any more into our business than is necessary," he said.
Mr. Soto concedes that his plan echoes elements of the federal catastrophe fund proposal being pushed by the organization Allstate helped launch–ProtectingAmerica.org.
"I like the whole conversation they've started," he said. "At least they had the courage to put a proposal on the table, as opposed to many companies that say they don't like this idea, or they don't like that idea, but won't say what they do like–other than the status quo, which is not working. Just look at how the private market is shrinking in Florida and Mississippi, and even on New York's Long Island."
He added that while he might disagree with ProtectingAmerica.org on details, "I agree wholeheartedly with them that it is critical we get everyone together to sit down and work this out, so we can have a national backup program in place, funded by risk-based rates."
On regulatory reform, Mr. Soto believes the biggest challenge will be defending the industry's limited federal antitrust exemption under the McCarran-Ferguson Act.
"My main interest is in promoting competition, which is what benefits consumers most," he said. "Everybody wins in a competitive market. We oppose anything that jeopardizes competition, and this [McCarran repeal] is a perfect example."
Removing the industry's exemption "would be very harmful to the regional and super-regional carriers that need to be able to share data to compete," he said. "A number of them will withdraw from markets if they don't have enough data to give them a comfort zone that they can write business profitably. That means we get hurt and the consumer gets hurt because we lose markets."
Mr. Soto also noted that if McCarran is repealed without safe harbors to allow for common policy language, "the client will be put at great risk in trying to compare policies. This is not where we need to be competing, because it just adds cost, uncertainty and exposure to the system. We can now add bells and whistles to enhance standard coverage, but if you strip out the standard language of policies, you undermine the security of the client."
In addition, the loss of common policy language would put agents and brokers on the spot in comparing coverage and explaining technical differences. "We'd be reinventing the wheel, while our errors and omissions exposure would soar," he said.
He also contends that going along with those in Congress who would strip the industry of its limited federal antitrust exemption just because of legal disputes over hurricane claims in Gulf Coast states would "punish the wrong people."
State Farm–the carrier criticized most often in Mississippi over Katrina claims-handling–"is big enough that it doesn't need to share everyone's data. They might get along just fine," he said. "But some smaller state mutual or regional carrier will be put on the spot and might have to drop out, meaning fewer options for buyers and more expenses to pass along. You end up hurting the little guy, and the consumer."
The Insurance Industry Competition Act (the proposed U.S. Senate bill that would free federal agencies to hold insurers accountable to federal antitrust laws) would result in "double or even triple regulation at first," he predicted, "and would likely lead eventually to full-fledged federal regulation"–to which Mr. Soto and the IIABA strenuously object.
"The federal government simply can't react quickly enough to meet local needs," he said. "You have to allow the local regulators to handle local problems. When you have a problem in your state on insurance, good luck calling the federal insurance czar."
This is why the IIABA is backing a bill that would have the federal government set standards for regulating surplus lines and reinsurance, while leaving the actual day-to-day oversight to the states, he explained.
If the federal government has to be involved with insurance oversight at all, this is the approach the IIABA prefers, having also backed the earlier State Modernization and Regulatory Transparency Act–better known as SMART–which would have set federal regulatory standards for states to implement.
"We believe there are areas, such as licensing and getting policies to market, where a streamlining of regulation would make sense," he said, "but that doesn't mean we need or would be better off with another massive federal bureaucracy to administer it. We definitely would not."
That's a big reason why the IIABA doesn't want an optional federal charter, according to Mr. Soto. "Be careful what you wish for, because you're playing with fire," he warned.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.