Regulators Hear Industry Concerns on National Insurance Catastrophe Plan

A new draft of the proposed national insurance catastrophe Plan created by the National Association of Insurance Commissioners was aired at the NAIC Winter Meeting. Some of the elements in the draft raised the ire of industry representatives who voiced concerns during a three-hour public hearing, though most supported the regulator’s efforts to tackle a comprehensive plan for major catastrophic events.

Generally, the objectives of the proposed plan created by regulators from California, Florida, Illinois and New York remain as discussed at the San Francisco Catastrophe Summit in November. Regulators say those goals are to create a plan to protect renters and homeowners by ensuring the affordability and availability of insurance against the financial consequences of national catastrophic events. The regulators also want to spread the catastrophic risk broadly among individual insureds, insurers, reinsurers, states and the federal government in a public-private partnership as well as reward mitigation of hazards.

However, the new draft of the plan raised questions for some industry groups.

The AIA, along with GeoVera Holdings, Inc., Liberty Mutual Insurance Companies, the Reinsurance Association of America and St. Paul Travelers, sent a letter to Commissioner Diane Koken of the Pennsylvania Insurance Department and then president of the NAIC, outlining their concerns. The letter urged the NAIC to “take into account the private sector’s ability to manage natural catastrophic risk before embracing extraordinarily complex governmental solutions that could adversely affect state or federal taxpayers and create unintended consequences in insurance markets leaving consumers at greater risk.”

In addition to resistence to involving the federal government in a solution, one of the sticking points in the draft was the proposed All-Perils Policy. Insurers say such a policy could create cross-subsidy problems by having homeowners in low risk, non-coastal areas subsidizing those in high risk areas, as well as creating cross-subsidy problems for all lines of insurance.

According to the NAIC draft, the proposed All-Perils Policy would indemnify homeowners in the event of damage to their home, regardless of the cause, (minus the deductible) and would contain no exclusions except for acts of war. In addition, the policy would contain the usual $500 or $1,000 deductible for non-catastrophic losses, but require a separate deductible for catastrophic losses based on a percentage of insured value that could range from 2 to 10 percent. A policyholder could opt for an endorsement to buy the catastrophic deductible down to the non-catastrophic deductible.

Industry representatives questioned whether the mandated All Perils Policy could be based on actuarially sound principles.

“The policy is too broad and comprehensive and our worry is that a lot of consumers who really need it won’t be able to afford it,” said Dave Snyder, AIA vice president and assistant general counsel.

However, others supported the regulators in their overall efforts and urged the NAIC to act quickly. Allstate Insurance Company’s Counsel Ed Collins urged the commissioners to get “a bill to the president early next year before the next Hurricane season.”

The Property Casualty Insurers Association of America said it supports provisions that would allow insurers to establish voluntary, tax-deferred, pre-event catastrophe reserves for the purposes of funding all or part of their exposure to catastrophe risks and for utilizing catastrophe bonds to develop additional capital for such risks.

The NAIC said it will allow a 30-day written comment period so that all interested parties have an opportunity submit their position on this draft of the catastrophe insurance proposal.