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Proponents push plans for natural catastrophe insurance solutions
Federal backstop proposals aired at NAIC public hearing in Alabama
The need for solutions to address insurance costs and availability in natural catastrophe-vulnerable U.S. coastal regions — including a federal safety net — was the general theme at a public hearing in Mobile, Ala., on Sept. 24.
Dozens of concerned citizens gathered to listen and contribute as politicians, regulators and insurers presented challenges, plans of action and possibilities during a half-day session hosted by the National Association of Insurance Commissioners.
Dave Hill, vice president and Regulatory general counsel for State Farm Insurance, said the storms that wreaked havoc in Florida and along the Gulf Coast in 2004 and 2005 demonstrated the need for both the public and private sector to better prepare for mega-catastrophes — before they occur.
“The time to address preparation for mega-catastrophes is now — before the unthinkable, but inevitable, occurs,” Hill said. “We need a coherent, comprehensive, and coordinated approach involving the American citizenry, private insurers, and local state and federal governments.”
Hill said creating a federal backstop for state catastrophe funds to help with pre-event funding for natural catastrophic disasters is vital to adequate preparation and helps protect taxpayers against unbudgeted appropriations. “It’s inevitable that we will experience disasters that exceed the capacity of the private sector and state catastrophe funds,” he said.
Hill added that the nationwide adoption of modern and effectively enforced statewide building codes would go a long way in reducing losses in the aftermath of natural disasters.
U.S. Rep. Tim Mahoney, R-Fla., attending the hearing telephonically, summarized a bill he co-sponsored with U.S. Rep. Ron Klein, D-Fla. The Homeowners’ Defense Act of 2007 would establish a federally-administered catastrophic insurance program to issue bonds that would provide backstop coverage to state-sponsored insurance funds following a natural disaster, according to Mahoney.
Klein and Mahoney’s legislation addresses a growing crisis in the availability and affordability of homeowners’ insurance. Their legislation allows states to responsibly plan for disasters ahead of time, while providing emergency relief for states located in lower-risk regions.
Louisiana Commissioner of Insurance Jim Donelon attended the hearing along with his cohorts from Alabama, Arkansas, Florida, Mississippi, South Carolina and the Virgin Islands.
Of possible catastrophe plans, Donelon said, “We are open to all solutions. We hope these will come from the private sector but we will need a federal solution as well.”
Mississippi Insurance Commissioner George Dale said the hearing was time well spent and that “some good information was brought forward.”
Dale agreed that a coalition of state, federal and free enterprise entities needs to be established. “We need federal involvement in the form of funding, but it should come under state control,” he said. “Coastal writing is a complex issue.”
John Miletti of The Travelers said the primary challenges for the consumer are availability and affordability while policy makers have to consider economic growth and disaster recovery. Carriers must deal with each state’s regulatory environment and reasonable long-term profitability, he added.
Travelers incorporates a wider coastal region — from Maine to Texas — in its coastal hurricane program proposal. Miletti said the program would continue state regulation for certain matters, including solvency and residual market regulation, while maintaining a market of last resort as a safety net and ensuring the rating approach is consistent with a federal program for pre- and post-event funding.
The Travelers scenario would change the CAT reserve accounting approach to “accrued over time” rather than when incurred, Miletti said, and participation in the National Flood Program in coastal and flood zones would be mandatory. The federal government would provide economic incentives for states based on their adoption, adherence and enforcement of federal building standards and other mitigation/loss reduction programs, Miletti added.
The Klein/Mahoney Homeowners’ Defense Act states that the federal government would be responsible for packaging and issuing bonds to provide high-level insurance coverage to the state-sponsored insurance funds. Revenue raised from the bonds would be combined with the revenue brought in from the state-sponsored insurance funds’ premium payment and held in a “firewalled” Treasury account comprised of high grade securities. In the event that a covered natural disaster were to occur, the federal government would provide funding to the state-sponsored insurance funds from the firewalled Treasury account to meet the terms of the catastrophic insurance contract.
The direct federal loan element of HR 3355 would operate concurrently with the bonding component and would provide assistance to state-sponsored insurance funds during periods when the federal catastrophe bond reserves fall below a certain threshold, according to the bill summary.
Arkansas Insurance Commissioner Julie Benafield Bowman said she was taking part in the forum because the “coastal insurance issue is a national issue, not just an issue for one state.”
Donelon said he will continue his push for a federal catastrophe fund and urge his fellow commissioners to hold future public meetings to carry on with the discussion of ideas and solutions for the insurance issues affecting the coastal states.
The NAIC planned to follow up the hearing with a session on catastrophe modeling at its national convention in Washington, D.C., in early October.