‘Adequate rate for the risk’ a big concern for industry executives

The question of how to structure property insurance rates adequately in coastal zones while still making it affordable for people to live and work there is becoming an increasingly important one to insurers and consumers alike, especially in the wake of two especially severe back-to-back hurricane seasons.

Insurance industry leaders participating in a panel discussion at the In-dependent Insurance Agents of Texas annual conference in Houston in mid-June drifted back to that question again and again, debating the pros and cons of whether property owners in non-coastal areas should subsidize policies for coastal dwellers and the extent to which state backed last-resort insurers were becoming insurers of first resort.

Moderated by IIAT Exec-utive Director David VanDe-linder, the panel, which included Robert Lindemann, president, Middle Markets Zurich North America Com-mercial Business Division; Marita Zuraitis, president, Property & Casualty Cos., Citizens and Hanover; Parker Rush, president/CEO, Republic Group; and Paula Rosput Reynolds, president/CEO, Safeco Corporation, generally agreed that a federally-backed catastrophe fund would not be a viable answer. The better choice, they said, is to give insurers the ability to set proper rates and get creative with coverage choices.

“It is about a system that allows us to get an adequate rate,” Zuraitis said. “But it’s not all about rate, it’s about creative people coming up with creative coverage solutions.” She explained that Citizens and Hanover would prefer to able to offer options so that “customers can choose what they want to pay for.”

Reynolds used Florida as an example of how not to deal with the problem. “You have a lot of carriers leaving the state, because there’s not a way for insurers there to provide adequate coverage. What you’re also seeing is the state beginning to have a bifurcated or trifurcated system, where residents who are full-time residents end up with different availability of insurance and people of different means being able to buy the state coverage versus not.”

Rush agreed, saying the state of Florida “is now going to be the largest personal property insurer in the state. Is that ultimately what we want to have occur? I don’t think so. … I think you’ve got to let the free market work.” He also asserted that people who live inland should not be forced to subsidize those who choose to live on the coast when the insurer of last resort, such as the Texas Windstorm Insurance Association, is not allowed by regulators to charge an adequate rate for the exposure.

VanDelinder, however, countered that people don’t “just choose to live at the coast” and that spread of risk is what insurance is all about. “They’re working there; they’re handling our goods that we ship out of those ports and they’re sending out refined gasoline. They’re an integral part of our economy,” he said.

Still, Rush asked, “Is it fair for a guy in Sherman Texas to pay more for his premium because somebody on the coast is not paying the proper rate for his property?” He said he had a “fundamental problem with that. I don’t think that’s the right solution … I think you have to go back to the right deductibles, the right policy for the coverage offered.”

Zuraitis added that, “like most things in our business this does get back to good old fashioned spread of risk in a free market system. We’ve learned a lot in Louisiana, as a company we have been there for over a 100 years. So this is an area that we know well. We know the risk—we do have appropriate reinsurance, we do a good job underwriting, we were able to handle our claims. But what we’re finding now… after [the catastrophe occured] is a knee jerk reaction as far as legislative restrictions.”

Emergency restrictions put in place in Louisiana after Hurricane Katrina tied “the hands of creative insurance companies that would have like to have found a solution,” she said. “… So it was difficult and continues to be difficult for us to navigate that system without the ability to rate appropriately to provide the right coverage for the right price.”

VanDelinder asked whether a federal or state backstop for natural catastrophes, which has been proposed by several national insurers, including Allstate, is necessary.

Rush said while legislators in catastrophe-prone states and carriers that are overexposed to catastrophes are in favor of it, “I think it would be a huge mistake to have a national catastrophe program. I am absolutely opposed to it.”

Reynolds agreed, citing the country’s “$24 billion failed flood insurance program.” She said the carriers who are in favor of it “are all-takers type of carriers” that manage their operations differently from the way “everybody else in this industry has tried to manage our business. We’ve tried to diversify our risk, we’ve tried to carefully select it, we’ve put a lot of effort into pricing our risk properly, and then we have a carrier who has not done that coming along and going on a stump. On personal grounds, professional grounds and the grounds of political pragmatism we’ll oppose it, and frankly we don’t see it getting a lot of traction compared to the amount of press it’s getting.”