New York–The chairman of Travelers said his company prepared a four-pronged solution to solve coastal insurance problems, and federal lawmakers can dust it off and grab onto it when the inevitable crisis in Florida propels them into action.
Jay Fishman, chair and chief executive officer of Travelers, reviewed the details of a "private market-based approach" to the coastal insurance crisis during a speech Friday at the 20th annual Executive Conference for the Property-Casualty Industry, presented by The National Underwriter Company, in conjunction with Ernst & Young and Dewey & LeBoeuf.
Since there is so much else for federal lawmakers to deal with right now, it will take a "crisis" to spur any action on coastal coverage proposals in Washington, Mr. Fishman said, referring specifically to a potential Florida crisis described in a question from Peter Porrino, global director of insurance industry services for Ernst & Young, one of the conference hosts.
In the Florida market, some 35 single-state companies "are all backed by a plan that is dependent on a post-event capital raise, which in today's environment is impossible," Mr. Porrino said.
"It couldn't take place," Mr. Fishman agreed. If a catastrophic windstorm event happens in Florida, the inability to finance the Florida Hurricane Catastrophe Fund and other state reinsurance mechanisms "will precipitate a real crisis and serious discussion about how to deal with this," Mr. Fishman said.
"Our goal has been to get [our proposal] out there, and communicate with anyone who is willing to listen," he said. That way, when the crisis event occurs–even if its six months down the road–lawmakers and staffers will remember that Travelers has a proposal ready "that's not a bad a idea to listen to."
He said the plan, which gained support from Nationwide and the Independent Insurance Agents & Brokers of America earlier this year, has already been discussed with Sen. Christopher J. Dodd, D-Conn., the chair of Senate Banking Committee.
"We have 7,000 employees in Connecticut. It's a big state for the insurance industry and he has been attentive and a very good listener," Mr. Fishman said, quickly adding, however, "I'm not in any way saying that he [Sen. Dodd] has embraced or endorsed it."
Travelers' representatives have also met with the staff of the House Financial Services Committee and several state governors, Mr. Fishman reported.
"There's a willingness to listen," he said, specifically highlighting feedback from Mississippi Republican Gov. Haley Barbour, who said he had a genuine interest in getting the Southern governors together and asking them to participate in pushing the plan forward when Travelers, Nationwide and the Independent Insurance Agents & Brokers of America announced the plan in July.
Mr. Fishman described the Travelers proposal with reference to "four pillars" that include:
o Regulatory stability resulting from the creation of four coastal zones–Gulf states, Florida, the Southeast other than Florida and the Northeast–in which there would be federal oversight of a "named windstorm coverage" part of the homeowners policy.
Hurricane winds don't know where state borders are, Mr. Fishman said, explaining the need for zones and for rate and underwriting regulation to apply within these zones
o Rating Transparency through regulatory vetting and certification of wind models and standards for setting risk-based actuarially sound rates.
o A federal reinsurance mechanism for extreme events (such as hurricanes causing losses several times greater than those arising out of Hurricane Katrina), which would be paid for by insurers so there would be no taxpayer subsidy
o Loss mitigation efforts including the establishment of federal guidelines for appropriate building codes and land use planning, with incentives for state and local adoption, as well as rewards for homeowners like meaningful premium credits for fortifying property to withstand wind damage.
Asked by Mr. Porrino where Florida's Gov. Charlie Crist is in his thinking on such proposals, Mr. Fishman responded, "It has been difficult to get a dialogue with the folks in Florida." He did say that Florida Chief Financial Officer Alex Sink "has been thoughtful" about the approach.
"That doesn't mean that she agrees. Don't misunderstand. There are lots of different views there, but it's a challenging environment [in which] to get a serious dialogue going," he said.
During his presentation, Mr. Fishman suggested that Florida isn't the only state where there might be a crisis that could spur action leading to the nation's capital.
"Texas may now be on a path to also having a bit of a crisis ahead of it," he said, suggesting that the size of an assessment for the Texas Windstorm Insurance Association resulting from Hurricane Ike earlier this year was significant enough to prompt some insurers to consider leaving the state.
In North Carolina earlier this year, Farmers Insurance announced that it would exit the state because of the insurer's concern about the residual pool there, "not because of their direct exposure" to wind risk, he said, referring to an August announcement by the carrier.
Noting that only a "real crisis that needs to be dealt with" will get something accomplished in Washington in a timeframe that is less than the usual pace of public policy change–which occurs over several years, not two or three visits to Capitol Hill–Mr. Fishman said he is open to hearing other proposals to bring to lawmakers in advance of the next crisis.
"We're not specific to this [proposal]. If any constituency has any thoughtful idea, we'll embrace that as well [at Travelers]. The thing that we reject is the notion that we simply take the cost and spread it across 300 million people," he said.
As described in an earlier National Underwriter article (dated June 16), the Travelers' proposal is a departure from proposals for a federal backstop (supported by Allstate and other carriers) because of the feature of the Travelers' plan that obligates insurers to pay the premium for reinsurance coverage of extreme catastrophic events.
The reinsurance feature is also a departure from the original plan outlined by Mr. Fishman in an Aug. 27, 2007 opinion piece published in the Wall Street Journal.
Mr. Fishman explained that because the federal government would charge insurers for reinsurance based on the loss costs and the expenses–dollar-for-dollar–without requiring a profit provision in the reinsurance premium, this would ultimately bring down the insurance premiums that homeowners pay to insurers.
During Friday's meeting, Mr. Fishman also went over the remaining concepts embedded in Travelers' plan in detail. One seemingly new detail that emerged (one which has not gotten much discussion in prior media reports about the Travelers' plan) obligating insurers to pay premium credits to homeowners if models used to price the wind coverage portion of the policy diverge significantly from actual experience.
"If that's open, transparent, and regulated by a federal regulator, we not only avoid the perception, but in fact we eliminate the reality that the insurance company wins and the consumer loses. That's an impossible place to be," he said.
Other details of the plan are outlined on the Web site www.coastalplan.com, he said.
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