Storm Fallout and Fall Colors

Once again, numbers released this month show that it’s great to be living in the Midwest. The National Association of Insurance Commissioner’s (NAIC) most recent study of average auto premiums for 2003 once again puts most Midwestern states well below the national average, with our very own South Dakota boasting the lowest average expenditures in the country (see the story on p. 38).

Then there’s the most recent study by the U.S. Bureau of Labor Statistics indicating that employers in the Midwest paid less in 2005 for total employee benefits than their counterparts in other regions of the country (see the story on p. 8).

All this would seem to make us feel more fortunate than our brethren in places prone to natural disasters or nutty legislation, like California, Florida or the benighted Garden State.

But the ongoing fallout from Hurricane Katrina is poised to have a devastating effect on everyone. Recent speculation that the reinsurance market could increase property premiums by as much as 50 percent will have a sobering effect on all of our premiums.

While the insurance industry continues to focus on the importance of the Terrorism Risk Insurance Act of 2002 (TRIA), the sobering reality so plainly illustrated by Katrina is that terrorism is only part of the problem. ISO’s most recent numbers for insured losses from Katrina now stand at $34.4 billion–and guess what? The hurricane season isn’t over until November. An increasing number of increasingly severe natural disasters pummeling an increasingly populated coastal area of our country spells a gargantuan problem–not only for residents and insurers writing coverage there, but for all of us.

The short-term solution, according to most observers, is for insurers to more adequately price coastal risks and other high-risk exposures. Better mitigation planning and improved building requirements that mandate storm-resistant roofing and other structural elements will also help against future losses.

In the long term, however, a publicly funded national disaster reinsurance pool, long under discussion, needs to become a reality. A recent analysis by KPMG points out that while federal legislators have resisted the idea because of the perception that insurers can handle whatever comes at them, events like Katrina may be changing that perception.

States like Florida and California already have in place reinsurance pools to handle high- magnitude disasters. Proponents of a national disaster pool suggest a federal program similar to TRIA, with high deductibles and high loss limits, capping insurer liability while paying out most losses. With the federal government already shouldering financial responsibility for the fallout from Katrina, the time may be right politically to promote such a fund.

Then again, if all this seems too overwhelming, enjoy what’s left of the fall color and head out to a bed and breakfast in one of our charming Midwestern tourist towns–or at least read about them on page 10.