U.S. Needs National Catastrophe Insurance Program, Insurance Commissioners Say

November 16, 2005

Insurance Commissioners from California, Florida, Illinois and New York began laying the groundwork Tuesday for what they hope will turn into a national catastrophe insurance program that would cover all Americans.

Hosting a two-day summit in San Francisco, the commissioners said the objectives were to come up with a plan to recommend to Congress that would: protect consumers by ensuring the affordability and availability of insurance against the financial consequence of catastrophic events; spread catastrophic risk broadly among insureds, insurers, reinsurers, states and the federal government in a public-private partnership; and reward mitigation of hazards, conserve capital for catastrophes, maximize capacity and provide seamless coverage and service to policyholders.

Although the Summit was being planned before Hurricane Katrina hit the Gulf, “You only need to look at the Gulf states to see the current [catastrophe insurance] system doesn’t work,” said California Commissioner John Garamendi. “We’re looking for the alternative to the Air Force One plan, where the president shows up at a disaster [site] and they just dump money out the back.”

If a major tremblor struck San Francisco, for example, with only 14 percent of homeowners carrying earthquake insurance, most people would be without financial resources to recover, Garamendi added. “A California earthquake would wipe out individuals, homes, families and the wealth of the community because they wouldn’t be able to rebuild. That would be economic disaster.”

To avoid such a situation in California or elsewhere, the commissioners invited speakers from across the industry to create a dialogue about how to form a layered insurance program that involves individuals, insurers, state governments and the federal government.

Among the ideas discussed were to eliminate the national flood insurance program and instead wrap flood coverage into a multiperil plan for hurricanes, earthquakes, floods, other national disasters and terrorist attacks that private insurers would make available to homeowners in every state.

Insurance executives from Allstate, State Farm, CNA and Greater New York Mutual indicated that gauging terrorist risk, unlike other natural disasters, would be difficult. Nevertheless, they indicated a better catastrophe insurance system is needed.

“The effort is not to develop a corporate shield, create a government bailout or a mechanism to give insurance companies bigger profits,” said Illinois Insurance Director Kevin McRaith. Instead, the national plan being discussed hopes to spread the liability for disaster recovery, with premiums reflecting the risk level homeowners face. “We want to allow consumers to purchase appropriate coverage at appropriate rates,” he said.

Risk modeling companies and economists speaking at the summit said the bill for Katrina—estimated at $125 billion—would be dwarfed by costs to recover from a major earthquake in the Midwest on the New Madrid Fault, a category 3 hurricane that strikes the Northeast, or a nuclear attack at a port in Long Beach.

“If Katrina taught us anything, it is better to plan and prepare than to respond after the fact,” New York Superintendent Howard Mills said.

The National Catastrophe Insurance Program Summit, which concludes today, attracted approximately 140 attendees, including regulators from 16 states, insurance industry representatives and a handful of lawmakers.

Outside the event, representatives of the Greenlining Institute, Black Economic Council, Oakland Citizens Committee for Urban Renewal and El Concilio of San Mateo County protested what they called continued discrimination by the insurance industry.

“The insurance industry is notorious for redlining, or discriminating against low-income and minority communities, and the industry should develop best practices in conjunction with minority community leaders,” they said in a statement.

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