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last updated on April 3, 2006

NATURAL DISASTERS

THE ISSUE IS... The high costs of recent natural disasters combined with the fear of future catastrophes have restricted homeowner's insurance availability in disaster-prone regions.

IT'S IMPORTANT BECAUSE... The Atlantic and Gulf seaboards and Hawaii are prone to hurricanes, and several Western, Northwestern and Midwestern states experience earthquakes. Multi-billion-dollar disasters, such as Hurricane Andrew and the Northridge Earthquake, demonstrate that insurance companies could become insolvent if overly concentrated in disaster-prone areas. Homeowners' insurance rates are regulated to make certain that they reflect actuarial risks. Reinsurance and capital markets by contrast are not similarly regulated and can result in private reinsurance costs that are four to 12 times higher than what can be charged at the consumer level. As a result, many insurance companies have stopped writing new business in or withdrawn from at-risk markets, making it difficult for residents to find homeowners coverage.

Therefore NAMIC has worked on developing solutions to these problems. To date, there are four different approaches that have been discussed. The first approach to solve this problem is through the state level using an NAIC model law. The second approach is to pass federal legislation that would allow insurance companies to reserve funds tax-free that can be used at a later date in the event of a future natural disaster. The third approach is through the use of private markets such as securitization, which today can only be accomplished offshore, making them very difficult. The fourth approach is to have the federal government act as the reinsurers of last resort, similar to the current TRIA program for terrorist attacks.

In the 109th Congress Congresswoman Ginny Brown-Waite (R-FL) introduced the "Homeowners' Insurance Availability Act of 2005" (HR. 846). This bill is similar to the federal re-insurance legislation that has been introduced previously in which the federal government would act as the reinsurer of last resort. Congresswoman Brown Waite has also introduced another natural disaster bill, H.R.4366. This legislation would establish a new federal program that would provide reinsurance directly to the states rather then to private carriers. This proposals intent is to help prop up many of the now existing state CAT funds, and to encourage other states to create new ones. In addition, Congressman Mark Foley has once again introduced his tax free reserve bill, H.R.2668. This bill would allow insurance companies to make tax deductible contributions to a tax-exempt policyholder disaster protection fund to be used to pay claims arising from certain catastrophic events, such as windstorms, earthquakes, fires, or floods.

In addition to the Congressional proposals highlighted, both the states and the insurance industry have begun looking at their own proposals. Starting in January the Wharton School of Business began work on a comprehensive look at different proposals for natural disaster. They will cover three different areas; the status quo, a non regulated insurance market, and a multi-layered insurance program. Not to be outdone, the NAIC has also been very active in this issue. In November of last year the NAIC held a disaster forum. At this forum they created their own unique proposal. This proposal calls for a multi tiered system in the event of a future catastrophic natural disaster.

The first layer would be the private share, once that level has been exhausted; a second state tier would kick in followed by a final federal tier. In addition to this multi tiered system, the NAIC also proposes that carriers should create an all peril coverage that includes flood insurance into the standard homeowners policy. NAMIC has come out early in opposing this system mostly on the grounds that we strongly oppose the concept of an all peril homeowner's policy.

With the damage that was caused by Hurricane Katrina, Congress has turned its focus to this issue. Early estimates have put total damages in excess of $100 billion dollars, and insurable damage anywhere between $20-$40 billion dollars. With the massive loss of life, and property, it will be hard for Congress to ignore this issue.

NAMIC POSITION... NAMIC believes that exposures to mega-catastrophes present a tremendous challenge to the insurance industry. NAMIC is exploring several different avenues to address the problem. Recognizing that companies have differing needs, depending on their books of business, NAMIC believes that there could be several solutions to the problem.

In recent years, the awareness of catastrophe exposures has expanded and the marketplace has responded. An increasing number of insurers have turned to capital market solutions such as surplus notes, catastrophe bonds and derivatives to prepare themselves for mega-catastrophes. Private industry solutions such as these, whereby insurance companies can access the financial markets for coverage at the highest layers, are the most attractive solution to NAMIC members. However, if it is not possible to find suitable private market solutions, NAMIC believes that the next best alternative would be state or targeted regional approaches that could address the needs of specific areas. NAMIC believes that a federal government solution should only be pursued as a last resort.

NAMIC members have conducted a thorough review of the legislation to establish a federal catastrophe reinsurance program. While NAMIC recognizes that the proposal could provide assistance to some types of property/casualty companies, the impact it would have on many of the association's small and regional companies would be non-existent in most cases and minimal at best, particularly in areas that do not have significant earthquake or hurricane exposures. NAMIC further recognizes the fact that in order to preserve the private reinsurance market, high triggers must be established in catastrophe exposed regions. However, these high triggers may prevent smaller NAMIC member companies from accessing the program.

Recognizing that the federal catastrophe reinsurance legislation could benefit some in the property/casualty industry, NAMIC would not stand in the way of its consideration. NAMIC remains concerned, however, that the proposal would lead to too much federal government involvement and provide limited benefit to the majority of its members. NAMIC will continue to consider additional changes to the proposal as well as other alternatives.

NAMIC does support the concept of a voluntary catastrophe reserve with favorable tax treatment. Such a proposal has the potential to more effectively address the needs of individual companies. However, as with any proposal, the costs and benefits associated with the proposal must be considered. It is important to determine the potential cost of a catastrophe reserve to the U.S. Treasury.

That cost must then be contrasted against the cost of federal disaster assistance programs. NAMIC is also interested in considering alternative proposals that would achieve the same objective without having a negative impact on the Treasury.

NAMIC believes that insurance securitization through SPRVs is a viable and useful means of risk transfer. Mutual insurance companies by their nature have less convenient access to capital in comparison to stock companies; and SPRVs, as a potential source of capital for undertaking risk, are therefore attractive to these companies. In addition, securitization by way of SPRVs is a market-oriented approach to financing natural disasters, which is preferable to NAMIC than direct federal government intervention. NAMIC generally supports proposals that would allow insurance companies to better manage risks, while at the same time increasing the long-term viability of the industry. Insurance securitization seems to be a sensible approach, and NAMIC will continue to work with Congress and state regulators to ensure the promotion of broader access to capital markets and increased stability of the insurance industry.

Whatever market or governmental solutions are ultimately adopted, NAMIC believes that mitigation provisions are essential to minimize the loss of lives and property from a catastrophe. Strict building codes should be used and enforced in catastrophe prone areas. NAMIC is a member of the Institute for Business and Home Safety, an organization created to enhance and promote the use of building codes and other measures to ensure that structures are safe. NAMIC will continue to support efforts to assist individuals, businesses and communities to responsibly prepare for natural catastrophes.

Due to the potential consequence of doing nothing, and the sheer amount of different proposals out there, NAMIC has formed a new Natural Disaster Task Force. This Task Force would comprise of 15-20 member companies representing all sizes and regions. The goal of the task force is to evaluate and recommend proposals that we believe would be beneficial to NAMIC's membership.