Coalition Says Insurer Group’s Disaster Plan is Insufficient

August 22, 2006

With the first anniversary of Hurricane Katrina one week away, the American Insurance Association (AIA) has unveiled a National Catastrophe Agenda designed to reinforce resilience to catastrophic hurricanes.

But not everyone, including Allstate Insurance, agrees the AIA plan is the answer, notably because it omits any sort of backup disaster insurance plan.

The AIA agenda contains specific steps that government officials, individuals, business owners and insurers can take to increase financial preparedness and expedite recovery from devastating natural disasters. The proposals include measures to protect people and property in harm’s way; steps to improve the stability of the insurance market; incentives for individuals to take a greater role in disaster preparedness; and National Flood Insurance Program reform, according to the association.

Marc Racicot, AIA president, said that with the the most intense period of the annual hurricane season, “we have arrived at a historic moment for the U.S. property protection system. We must examine all the interdependent elements of this system to make sure they support, rather than undercut, each other.”

Over $7 trillion in privately insured property is at risk in coastal communities today. Of even greater concern, according to Racicot, “are the millions of people who live in under-prepared communities along our coasts. While there are many obstacles to comprehensive reform, it is something that must be done – and the time to do it is now.”

Racicot stressed the importance of “effective, universal, and strictly enforced building codes and sensible land use planning policies.” He also noted the importance of a healthy, competitive insurance marketplace founded on “risk-based pricing.”

“True risk-based pricing encourages responsible choices (such as where and how to build a home or business) and discourages dangerous, reckless choices,” noted Racicot. “Artificially suppressed insurance prices distort insurance markets.”

He cited the National Flood Insurance Program (NFIP), which now is being bailed out by taxpayers across the nation, and state-run wind insurance programs, which also have required bailouts, as examples of how politically suppressed rates mask the true cost of coverage, with consumers ultimately picking up these costs through back-end taxes or other payments.

“We believe that it is better to be open about the risks and costs of coastal property at the beginning of the land development or purchase process, through risk-based pricing of public and private insurance,” Racicot said.

Among other AIA proposals included in the agenda are: enactment of tax-exempt personal Catastrophe Savings Accounts; creation of state and/or federal programs (e.g., matching grants) to encourage property owners to invest in loss prevention tools, such as hurricane-resistant garage doors and window shutters; and federal and state assistance to improve procedures related to claims adjustors to facilitate payments to disaster victims.

Racicot noted that many AIA proposals would be politically difficult to achieve, particularly in an election year. As a result, he emphasized the need for stakeholders to “get beyond all of our own, separate interests …[in order to] dedicate our collective energy to pre-disaster prevention and preparedness, as well as post-disaster response and recovery.”

Racicot called on all the other stakeholders to put their suggestions for natural disaster risk management on the table, and to begin the “formal process of distilling our and others’ ideas into effective solutions.”

That’s just what a group called has done. Allstate Insurance is a founding member of the organization. James Lee Witt, former director of the Federal Emergency Management Agency, is the group’s chairman.

This group, a coalition of first responders, homeowners insurance companies, disaster recovery experts, and small and large businesses, criticized the AIA plan almost immediately after it was released.

The coalition, which supports a reinsurance backstop for disaster insurance, maintains that AIA has cobbled a catastrophe response plan that is inadequate.

“By failing to include a privately financed catastrophe fund, the AIA plan endorses the risky status quo and depends upon a system of year-to-year reinsurance contracts at ever-escalating prices with no lasting or accumulated protection for homeowners,” said Pete McDonough, a spokesman for

“The only certainty contained in the AIA proposal is higher premiums for homeowners, and an alarming dependence on offshore reinsurers and financiers,” McDonough said.

“Essentially, the AIA is offering American homeowners the equivalent of a car without seatbelts or airbags,” he added.

“Defending the status quo — counting on record-setting rate increases, crossed-fingers and hoping for the best, shortchanges American families,” McDonough said. supports a private-public partnership that would serve as a backstop to the traditional insurance market in the event of a storm or earthquake of catastrophic proportions.

In the coalition’s desired plan, private insurance company contributions to catastrophe funds would be tax-exempt, as would the funds’ earnings. They would grow, year after year, just like personal retirement accounts, and would be tapped only in the case of a catastrophe that would overwhelm the capacity of the private market.

“These funds are no more of a new government program than are IRAs,” McDonough said. “To call this a government program is to say that individual IRAs are the Social Security System,” he said.

Sources: AIA

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