Insurer CEOs Address Cat Fallout at PCI Meeting

Several top insurance executives discussed the ramifications of Hurricane Katrina and other natural disasters in a panel discussion last month at the annual meeting of the Property Casualty Insurers Association of America.

The CEOs shared their experiences and opinions on natural disasters and how their businesses were poised to handle such exposures.

For C. Lee Ellis, executive vice president of operations for Alfa Insurance Cos., based in Montgomery, Ala., the turning point came in the wake of Hurricane Ivan, which in September of last year devastated Alabama. The company was hit with 60,000 claims, $325 million in covered damages, and “four months’ worth of claims in a 24-hour period,” Ellis said.

Alfa’s response to Ivan was to aggressively overhaul its entire disaster recovery plan, and when Katrina hit the ground, they were prepared. The plan starts before a hurricane makes landfall with ongoing monitoring, working with reinsurers and modeling agencies to determine adjuster deployment to areas most likely to be hit according to Alfa’s book of business.

Then a temporary claims line is set up where claims can be electronically grouped and sorted by severity. Alfa establishes storm centers in stricken areas with self-contained units powered by generators and set up within 48 hours of emergency readmittance to a stricken area.

Because of this plan, Katrina’s impact was “significant,” but not the surprise Ivan had been, Ellis said. Alfa was able to deliver claims service to 30,000 customers within 30 days after adjusters were permitted to go back into the affected area.

Greg Hendrick, senior vice president of XL Re Ltd., a Bermuda-based reinsurer, conceded that reinsurance prices would inevitably rise in the wake of Katrina,
but went on to discuss the drivers behind the increases. This he attributed to a demand surge preceding the storm for building materials in the U.S. and abroad, with costs steadily rising for construction materials.

A similar “adjusters’ surge” meant that the industry was already running with fewer adjusters than needed after last year’s spate of hurricanes. Today, the average adjuster’s day rate is up 15 percent, and many insurers are considering importing adjusters from overseas because of the shortage.

Another problem lies with the fact that some insurers place too much importance on model data, which, while valid, was never designed as a precision underwriting instrument, Hendrick noted.

And finally, scientific data tracking storm wind strength indicates that since 1975, the increasing warmness of the sea surface has resulted in higher winds and more damage. All of these variables will contribute to the anticipated spike in reinsurance prices, Hendrick said.

Robert Joyce, chairman and chief executive officer of the Westfield Group, based in Westfield Center, Ohio, presented a unique Midwestern perspective to the issue. Although he admits his company’s strong regional book of business insulated it from most Katrina losses, the magnitude of loss from business interruption in the Gulf Coast region is yet to be determined.

Joyce observed that because of the commercial market’s more sophisticated buyers and product, it seems to be less affected by the storms than the personal lines market. So far there seems to be no lack of capacity, and the industry is not seeing the company insolvencies post-Katrina that were evident after Hurricane Andrew.

He speculated that while some capacity may shift to the Midwest and away from coastal areas in the long run, he does not predict any sort of mass exodus from coastal housing, especially as aging Baby Boomers seek to retire to those areas.

But whatever changes the hurricanes impose on the industry, the answer to the challenge is not to retreat to safer states, or to ignore public sentiment, concluded Gregory Ostergren, chairman, president and chief executive officer of American National Property and Casualty Co., based in Springfield, Mo. “Insurance is a contract between business and society,” he said. CEOs should take this opportunity to voice this and “seek to lead rather than barely reacting to these debates.”

Ostergren pointed to Florida as a state where the regulatory system has failed consumers by allowing poorly reserved insurers to write homeowners business in the state. And Florida’s “quasi-government-run insurers” such as the guaranty fund and wind fund mean poor and moderate-income homeowners are subsidizing the wealthy building million-dollar homes on the beachfront and providing incentive for builders to take risks there.

To amend these inequities, Ostergren condones a national free market rate modernization system “to give consumers real choices,” coupled with a mandatory tax-deferred cat reserve fund to protect insurers against future disastrous losses. Regulators need to practice strong solvency and market conduct monitoring of insurers and a revamping of state guaranty funds to eliminate subsidy systems.

For mitigation, he supports fortified building codes in disaster-prone regions and an insurance foundation that will assist low- or moderate-income property owners in bringing their structures up to these codes.

Ostergren concluded that an overhaul of the National Flood Insurance Program and tort reform to prevent egregious lawsuits will further assist in preparing the insurance industry for future disasters.