September 20, 2005

NAIC and Feds Compete Over Control of Cat "Insurance" Future

A summit meeting of leading states' insurance commissioners will address formation of national responses to mega-catastrophes like Hurricane Katrina. California's John Garamendi told the press: "As insurers begin to sort through a deluge of claims, and as survivors confront the fact that some losses won't be covered, it will become painfully clear that a single, national policy is the only answer." Other big states' insurance regulators made similar statements supporting a national policy for assuring comprehensive insurance coverage for mega-catastrophes. Insurance Commissioners To Form National CAT Insurance Program

At the same time, the Congressional Research Office just released a paper dated 9/15/05 that records discussion in Washington about the need for a federal solution to assure availability of insurance for mega-catastrophes. Congressional Research Service: Hurricane Katrina: Insurance Losses and National Capacities for Financing Disaster Risk

The tension between competing state and federal proposals for an insurance solution to an uninsurable hazard is reminiscent of the tension between state and federal authorities over who will regulate insurance, and to what end. Unintended Consequences: Hearings on "SMART" : Federalizing insurance regulation? (June 23, 2005)

(read more)

Meanwhile, reports about FEMA indicate that it is living on a hand-to-mouth basis, without significant reserves. This is very comparable to the situation of the principal state wind pools in states ravaged by Hurricane Katrina Unintended Consequences: Impact of Katrina on Gulf states' wind pools (September 17, 2005). According to the Atlanta Journal Constitution, FEMA reports about $100 million on hand, with a routine line of credit from the U.S. Treasury of $1.5 billion, which is being raised by the Congress. An advisor at FEMA estimated about $2 billion in flood claim losses from some 244,000 flood policies, nearly 90% of them in Louisiana. The advisor reminded the Journal Constitution that many of the hardest-hit areas were public housing that municipal housing authorities self-insure.

According to the report, FEMA is statutorily prevented from raising rates more than 10% year-to-year, so its going to be unable to recoup its losses for many years, if ever. In other words, the American taxpayer will be paying for the losses of those that bought NFIP insurance, because the federal government assured that NFIP cannot recoup a mega-loss from its surviving rate base. Katrina: The Aftermath: Flood claims to bring tide of red ink (Atlanta Journal Constitution Sep. 17, 2005) (free registration required).

At that level of analysis, even the existing government "insurance" for disasters looks a lot like "spend and tax," without the rigor of risk evaluation, underwriting judgment, actuarial pricing, rational reserving and conservative financial audits. And we all know now about the management at FEMA.

Is that the sort of solution likely to come out of Washington if left to political forces? One cannot expect rational business people that manage commercial insurers to be able to offer alternatives to "spend and tax" programs. The result may be further government subsidies of development in vulnerable areas, leading to further loss of life and property during the inevitable next "big wind" to hit the affected areas.

And, as Hurricane Rita is now reminding us, sometimes that next "big wind" comes sooner than you think. For latest tropical storm status, see: FEMA: Tropical Storm Watch

Posted by dougsimpson at September 20, 2005 07:53 PM