NAIC Moves A CAT Plan Paper Offering Varied Approaches

NU Online News Service, June 16, 1:01 p.m. EDT

MINNEAPOLIS–A unit of the National Association of Insurance Commissioners has adopted a white paper outlining insurance protection concepts for catastrophes that acknowledges insurer and regulator differences.

The Natural Disaster White Paper 15^th draft was approved by the NAIC's Property and Casualty Insurance Committee at the organization's Summer Meeting here.

The paper is designed to examine approaches to insurance against catastrophic natural disasters.

Some insurance and reinsurance associations said they were concerned with previous versions because, as noted in an October 2008 Reinsurance Association of America (RAA) letter, those versions implied natural disasters are uninsurable and advocated government insurance risk sharing.

The new version includes alternate perspectives and notes that regulators and the insurance industry do not agree on how best to resolve the issue of properly covering catastrophic losses.

The previous version of the white paper, the method endorsed and still contained in the current version, calls for three layers of protection at the private, state, and federal levels.

The first layer involves developing a "comprehensive mitigation program" that would vary depending on the state and the disaster risk.

It also calls for allowing insurers to set aside a portion of premiums into a reserve for future catastrophic events.

Additionally, the first layer calls for "enhancing the insurance contract," suggesting insurers make a mandatory offering of an "all perils" policy. Consumers could opt to exclude certain risks if they choose.

The second layer would see the voluntary creation of state or regional catastrophe funds that would kick in at a certain trigger point.

The third layer calls for limited involvement by the federal government. "The purpose of this layer would be to provide a mechanism for spreading the timing of catastrophic event insured losses," states the paper. "To that extent, the plan only considers insured losses."

It adds, "The true costs of a catastrophic event should include losses outside the private insurance contract; the federal government will always be responsible for these losses based on its role in society."

The RAA opposes the plan, noting in its October 2008 letter that natural catastrophe risk is best left to the private marketplace, which has weathered recent catastrophes well.

The letter notes that only Florida presently has a catastrophe fund that would be eligible for the federal reinsurance contemplated in the white paper. The RAA noted problems that Florida has had ensuring the fund has enough capital to pay for a catastrophic loss.

The RAA letter also says such funds are a "political response to an economic issue," and do not proactively reduce risk. They also concentrate risk, rather than spreading it, the RAA asserted.

In the current version of the NAIC white paper, Connecticut, Louisiana, South Carolina and Mississippi offer their perspectives on the issue.

Connecticut, for example, opposes the creation of state catastrophe funds backed by the U.S. government. "Our opposition goes to all state or regional catastrophe funds unless they are fully secured and/or collateralized by the states where the funds and their risks are located," the perspective notes.

Louisiana supports relieving the tax burden on reserves for catastrophes and requiring state-sponsored entities to charge actuarially sound premiums to receive federal financial support, in addition to requiring flood insurance as a prerequisite to wind and hail coverage.

South Carolina and Mississippi state the NAIC should favor an emphasis on personal responsibility and private market solutions over government solutions, while endorsing a federal backstop for extreme catastrophic events.

Dave Snyder, vice president and assistant general counsel of the American Insurance Association, said the current version of the paper reflects the deep concern some states had with the national catastrophe plan that was circulated. While representatives from the RAA argued at the committee meeting that the white paper should be more clear it does not endorse any one plan, Mr. Snyder said he was satisfied that no preference is expressed.

The white paper will now go before the plenary for adoption, Mr. Snyder said.