Congress Poised To Assess Catastrophe Bills, Extension Of TRIA

Congress will be back at work this week with a full insurance-related agenda, leading off with debate over the proper federal role in insuring against catastrophic losses, as lawmakers consider bills dealing with both terrorism and natural disasters.

Action will begin Sept. 6 in the House Financial Services Committee, during a hearing before two of its subcommittees on legislation introduced last month–the Homeowners Defense Act of 2007. The bill would allow states to pool catastrophe risks, then transfer them to the private market through the sale of catastrophe bonds or purchase of reinsurance.

The bill would also establish a National Homeowners Insurance Stabilization Program to provide low-interest federal loans to states impacted by severe natural disasters.

Industry officials expect the House catastrophic loss bill to pass the Financial Services Committee panel, and likely the full House, by mid-October. The legislation was introduced by two freshman Democrats from Florida–Tim Mahoney and Ron Klein–just before Congress left for a month-long recess Aug. 3.

Support for the legislation within the insurance industry is fluid, with some companies and agents taking a long look at it, while others see the need for major revisions before they could support it.

House action is also expected in late September on legislation expanding the National Flood Insurance Program by adding coverage for wind losses.

One insight into the industry's concerns about the fall's legislative agenda was voiced in a recent interview with Leigh Ann Pusey, chief operating officer and senior vice president of government affairs at the American Insurance Association. She cited concern in general about bills expanding the NFIP as well as the Klein/Mahoney bill, saying “our members would not support any catastrophe/all-perils bills.”

The reason, she said, is AIA and its members believe government involvement in catastrophe risk will lead to too much “command and control”–in the form of government involvement in setting rates and policy limits. It is best left to the private sector to provide this coverage, she added.

Illustrating an industry divide on the Klein/Mahoney bill, Joseph Annotti, senior vice president of public affairsat the Property Casualty Insurers Association of America, voiced support for some parts of the proposal. He said it contains a “key provision that PCI has been advocating for more than a year”–namely, a “liquidity loan” program for state or regional catastrophe funds.

“Of all the ideas and proposals to address the issue of insuring against future natural disasters currently being debated by Congress, PCI believes the 'liquidity loan' program provision in Title II of H.R. 3355 should be one of the key elements of a comprehensive public-private program to stabilize catastrophe-prone insurance markets,” he said.

But the bill is not without flaws, Mr. Annotti noted. “PCI is mindful of the need to be extremely careful in structuring any federal role so that it does not undermine the overriding need to attract new private capital to the market,” he said.

Accordingly, any federal financing role should include measures intended to promote freedom for private markets to respond to these exposures, according to Mr. Annotti, including support for:

o Greater rating freedom.

o Actuarial soundness of private market rates.

o Product innovation.

o Use of sound underwriting tools.

o Lower market barriers.

Justin Roth, senior director of federal lobbying for the National Association of Mutual Insurance Companies, said that while his group is “pleased” Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, “has taken such an active role in looking into solving the problems of homeowners in disaster-prone areas, we would encourage him to not only look at the Klein/Mahoney proposal, but to also look into other possible solutions.” Specifically, he cited:

o Tax incentives for homeowners to save money for future disasters.

o Federal incentives to encourage stronger building codes.

o The creation of a bipartisan commission to look into the problems along costal regions.

Meanwhile, although it is likely just a coincidence, the House is expected to take up a bill on Sept. 11 that would extend and expand the Terrorism Risk Insurance Act. The bill is being strongly supported by the industry, although its scope and duration is likely to be reduced when it is dealt with in the Senate–probably before Thanksgiving.

The House bill expected to hit the floor soon extends the program for 15 years, which is strongly supported by the industry, but also adds coverage for nuclear, biological, chemical and radiological events–risks that insurers are not eager to absorb.

Regarding concerns that disputes over the length of the extension might derail the bill, Ms. Pusey said Congress “knows this program expires” at year's end. She added that neither the White House nor members of Congress want to be seen as the reason the country's terrorism reinsurance backup is allowed to sunset, leaving the industry and policyholders exposed to terrorism risks.

While she acknowledged the 15-year extension period “will be an issue in the Senate,” she noted “this is a bipartisan bill,” which should ease passage before expiration.

Regarding potential amendments on the House floor and in the Senate bill cutting back on the expanded coverage mandate, she sees strong support for the “certainty” provided by the NBCR provisions. However, that doesn't mean the industry will accept whatever new risks Congress wants to pass on to insurers. “We don't want it at any price,”" Ms. Pusey said. “It needs to be done in a workable way.”

She also said the industry would not support NBCR coverage as the price to pay for supporting the coastal catastrophe provisions, but added that no one in Congress has proposed any linkage between the two bills.

Joel Wood, senior vice president of government affairs at the Council of Insurance Agents and Brokers, expects “relatively easy passage” of the Financial Services Committee's TRIA extension bill on the House floor. He also believes “there is a better than even chance that flood insurance reform will again be passed.”

He predicts the flood bill “will probably” encompass the provisions adding wind coverage to the scope of the federal flood program proposed by Rep. Gene Taylor, D-Miss., “given Speaker [Nancy] Pelosi's strong support for Rep. Taylor.” However, Mr. Wood added, “I don't envision that provision surviving in the Senate.”

On TRIA, he said it is an “open question” as to whether an early accord can be reached in the Senate Banking Committee. “Those who support the [Bush] administration's view of a more limited and narrow program have little incentive to cut a deal right away, leading to the prospect that we could repeat another December nightmare,” Mr. Wood said.

“This will be chaotic for brokers and their clients, as provisional exclusions will apply to policies in effect after Dec. 31 and pricing decisions will have to be made on the fly in a very narrow time frame,” he added. “Still, I remain bullish that we will get to the finish line on an acceptable, workable, more long-range TRIA program.”

The Financial Services Committee is also expected to hold three hearings this fall on insurance regulatory reform issues, although whether those hearings will include a specific debate on legislation that would create an optional federal charter is unclear.

Mr. Roth of NAMIC said his group “continues to oppose any attempt to create a new federal bureaucracy to regulate insurance. While NAMIC agrees that reforms of the current state-based system are needed, we do not believe that creating another layer of federal bureaucracy is the answer.”

Charles Symington, senior vice president of government affairs and federal relations at the Independent Insurance Agents and Brokers of America, said his group will continue to advocate “targeted federal legislation to improve the state system and [is] against federal regulation, optional or otherwise.”

In particular, he said IIABA will lobby aggressively against legislation to create an optional federal charter–the National Insurance Act, which has been introduced in the Senate and recently in the House. “But the IIABA is working closely with other insurance groups in support of the Nonadmitted and Reinsurance Reform Act, which passed the House by voice vote in June,” he said.

“We are hopeful that the Senate Banking Committee will act on the bill in the fall or early next year,” he added. “We have also begun work on targeted federal legislation to streamline producer licensing and expect to see legislation introduced shortly.”

The industry is keeping a close eye out for Senate Judiciary Committee action on legislation repealing the McCarran-Ferguson Act, although whether the panel will decide to consider it this fall is unclear.

Independent agents will seek to reverse provisions in the House version of the 2007 farm bill, which calls for a 2.9 percent administrative and operating expense reimbursement for crop insurance. Agents are concerned this could lead to as much as a 30 percent cut to crop insurance agent commissions, Mr. Symington said.