While the State of Florida remains transfixed by the thought of another hurricane season and the possible economic impact it may spawn, one thing is clear: Don't expect the federal government to come to the rescue any time soon. That was just one of the major points issued by Alex Soto at the Florida Association of Insurance Agents' 103rd Convention and Education Symposium.
Soto is president of the Miami-based InSource, Inc., and is a former chairman of FAIA. These days, however, he is chiefly known as the president of the Big "I," the national Independent Insurance Agents & Brokers Association. Speaking at FAIA's convention, Soto offered a range of thoughts concerning agents and the latest happenings on the state and federal level.
After the 2004 and 2005 hurricane seasons that culminated in the almost wholesale destruction of New Orleans, the environment appeared to be shifting in favor of establishing some form of federal backstop when it comes to natural disasters. That sentiment, however, quickly receded. Soto said the prevailing wisdom remains the same; representatives from inland states are still resistant to pay for damages that are not sustained in their own states. "At the federal level there is no appetite for something like [Florida's] CAT fund," he said. "Too many representatives view it as a bailout for the people of Florida and others that choose to live along the coasts."
Without such a program, Soto said that the feds could do little more than "fly over in Air Force One and start shoving FEMA money out the door." Taking an even dimmer view of the problem, Soto said that unfortunately it might take another round of hurricanes to reverse Congress' opinion. "It could take another big one, but until then, the debate goes on and the national association is going to continue fight," he said.
Slow Going in Washington
That is not to say that some federal lawmakers are not doing their part to further the cause. Congresswomen Ginny Brown-Waite (R-Florida), who was a long-time member of the state legislature, has sponsored H.R. 330, the Homeowners' Insurance Availability Act, and H.R. 91, designated as the Homeowners' Insurance Protection Act. Both were recently discussed at the Senate Committee on Banking, Housing, and Urban Affairs. The two bills take differing approaches to provide some form of a financial backstop depending on the level of loss due to a natural disaster.
Under H.R. 330, the country would be divided into six different regions whereby insurers could purchase at auction reinsurance contracts from the U.S. Treasury if the cost of natural disasters equaled or surpassed a one-in-100 year event. The reinsurance could be a fraction of that sold in the private market, potentially as low as a quarter of what private reinsurers would charge. Testifying before the committee, Brown-Waite said that reinsurance is the key piece needed to sustain the private insurance market in high-risk areas.
"In 2002 in Florida, the cost of reinsurance was 7.1 percent of every dollar a homeowner spent on insurance. Just four years later, reinsurance accounted for 44.5 cents of every dollar homeowners spent," she said. "Until this market stabilizes and reinsurers provide a product that is available and affordable, the federal government must have a role."
Taking a broader view of the problem, H.R. 91 would allow the federal government to sell reinsurance policies to states that have established state catastrophe funds. Brown-Waite said it was a better solution, since the burden would be on states to plan for natural disasters by enacting building codes and committing at least 35 percent of the state fund's monies for mitigation efforts. Under the bill, the federal money could not be accessed unless the state experiences a one-in-200-year event. The bill also would allow private insurers to establish reserves that could be set aside to pay for future catastrophic losses, a controversial idea that has been circulated for years. From the industry's perspective, the accounts would grant insurers the ability to financially plan for the economic impact of large losses. Regulators, however, have fought against the accounts on the basis that they could be used as a tax shelter to protect profits.
To buttress her argument, Brown-Waite pointed to the success of the federal Terrorism Risk Insurance Act that was established after the Sept. 11, 2001 terrorist attacks. Although the fund has not been activated, it has had an effect on the market. In 2003, only 27 percent of all companies nationwide purchased terrorism insurance. By 2005 that number jumped to 58 percent while the cost of the coverage only accounts for between three percent and five percent of total property insurance costs.
"I don't propose that my bills are the silver bullet or the final answer," said Brown-Waite. "However, my bills are part of the solution and, if passed with some of the other good proposals members have introduced, could go a very long way to protect property and casualty customers nationwide."
Compensation
The debate over a federal financial backstop for catastrophes aside, Soto said that agents also face several other issues that could affect their livelihoods. Specifically, carriers will continue to pay agents contingency fees, and agents will be required to disclose to policyholders the amount of premiums set aside to pay agents. Soto said that the Big "I" has been successful in preserving contingency fees by educating lawmakers that the fees align the interest of the carrier, agent, and consumers. However, there is still some concern that some attorney generals are making an end run around the authority of regulators and lawmakers to interfere with the commission system.
The issue arose on a national level after New York-based Marsh & McLennan found itself in the middle of a major scandal involving bid-rigging insurer contracts. Former New York Attorney General Eliot Spitzer also alleged that some of the country's largest brokers ignored their clients' interests by pocketing higher fees to steer business to certain insurers. Spitzer, who is now governor of the state, reached an agreement with companies so that they could not offer incentive compensation to agents and brokers if 65 percent of a line of insurance was sold by companies that didn't pay commissions.
The agreement applied to homeowners', personal auto, boiler and machinery, and financial guaranty insurance. Last November, ACE, AIG, Travelers, Zurich, and the Chubb Group were all notified by Spitzer that they had crossed the 65 percent threshold and could no longer offer incentive compensation.
Another major issue is a push to require agents to disclose to policyholders what portion of their premiums is being used to compensate agents. Soto pointed out that this is a continuing source of concern since it could obscure the value of agents. He also said that if agents were required to disclose the information, the same requirement should be placed on carriers. "Let's get all the costs out there and disclose the salaries of CEOs and the profitability of the companies," he said as the conference members applauded in agreement.
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