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last updated on March 30, 2007

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 Katrina 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 As a result, many insurance companies have stopped writing new business in or withdrawn from at-risk markets, making it difficult for residents to find homeowners coverage. The already bleak situation turned even worse due to the number and severity of storms in 2004 and 2005. In some states such as New York and Washington, some carriers are pulling out of entire markets.

In response to the troubling market conditions, in December 2005, NAMIC formed a Task Force on Natural Disasters and invited representatives from 20 of its member companies to participate in a discourse on this subject. During the ensuing six months, the task force held regular meetings during which members were briefed by researchers, analysts, and practitioners from a variety of disciplines who were selected for their expertise in particular areas of disaster risk management and insurance. The task force also studied and discussed a sizable body of literature on natural disaster issues. Based on this process, the task force formulated four general principles that will serve to guide NAMIC members and staff as the natural disaster debate evolves.

The principles are:

  1. Market freedom and competitive pricing will lead to innovation in developing solutions to problems relating to disaster insurance and mitigation.
  2. Competitive pricing and risk-based underwriting are essential to developing and maintaining a viable disaster insurance market.
  3. Mitigation must be an indispensable aspect of any disaster risk management and insurance initiatives.
  4. The National Flood Insurance Program should be maintained, but must be reformed.

Following Katrina, lawmakers continued to look into possible solutions. In general, 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, or establishing state sponsored backstops such as the one in Florida. The second approach is to pass federal legislation that would allow insurance companies and/or homeowners 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 110th Congress, Rep. Ginny Brown-Waite, R-Fla., has already introduced the "Homeowners' Insurance Availability Act of 2007" (HR. 330). 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. However, as opposed to her legislation in the last Congress, Rep. Brown-Waite has decided to also include Catastrophic Capital Reserve Funds (tax-deferred reserves). During previous Congress' many people had argued that the proposals should be merged. At this time, it is unclear if merging the two proposals will hurt or help the legislation move through the process. It is also likely that someone will again introduce a stand alone tax bill. In previous Congress', the tax 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.

NAMIC POSITION. NAMIC realizes that those who live and do business in catastrophe-prone areas will face serious challenges in the years ahead. We believe that the most effective mechanism for addressing these challenges is a private insurance market whose defining characteristics are open competition and pricing freedom. Congress can play a constructive role by reforming the National Flood Insurance Program (NFIP), offering tax incentives for companies to reserve funds for future disasters, and providing incentives for states to enact and enforce effective statewide building codes.

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