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The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, heard testimony today from industry advocates to discuss the need for public and private sectors to work together to develop market-based solutions to the problem of providing natural catastrophe insurance coverage to homeowners and businesses across the nation.
Congress can play a constructive role in assisting the private market to ensure that the nation’s homeowners and insurers are prepared for the next major natural catastrophe, said Chuck Chamness, president/CEO of the National Association of Mutual Insurance Companies (NAMIC), to the Subcommittee at its hearing on “Stablizing Insurance Markets for Coastal Consumers.”
The havoc wreaked by the 2005 Gulf Coast hurricanes has raised important questions about how Americans should prepare for and respond to natural disasters in the future. The likelihood of more frequent and severe natural disasters in the near term, combined with the continuing population growth and development in areas vulnerable to natural disasters, pose significant challenges for government policymakers, insurers, realtors, home builders, mortgage lenders and property owners.
“The future stability of coastal markets will be threatened by the increase in storms, state suppression of rates, and litigation that seeks to rewrite regulator-approved insurance contracts that have been in force for decades,” Chamness explained.
The Property Casualty Insurers Association of America (PCI) reiterated the association’s comprehensive policy position on catastrophe insurance funding that supports private market solutions, stronger building codes and land use regulations backed up, where needed, by state catastrophe funds and limited, high-level federal financial support for responsibly managed state funds.
Greg Heidrich, PCI’s senior vice president, policy development and research, said that the nation’s increasing exposure to natural disasters such as hurricanes, earthquakes, floods, tsunamis, and volcanic eruptions is exacerbated by the dramatic increase in population growth and real estate prices in the most disaster-prone areas. This not only increases the economic cost of recovery, but also leaves a growing number of Americans with a large portion of their personal net worth exposed to catastrophic loss, he said.
“This exposure demands action,” Heidrich said. “And property/casualty insurers are ready to help shape solutions that help prevent losses and spur more private market participation to address the needs of consumers, insurers, and government.”
PCI says that greater market freedom, stronger building codes and land use regulations, National Flood Insurance Program reform, creation of state catastrophe funding facilities, federal liquidity support for state catastrophe funds, and tax-deferred reserves and catastrophe bonds, are needed.
American Insurance Association President Marc Racicot also said his association supports better protective measures that aid in loss prevention and reduction.
“Keeping people out of harm’s way and strengthening their ability to resist future hurricanes, is the first part of AIA’s agenda,” said Racicot.
“Mitigation works. Strong and well-administered building codes, policies to encourage retrofitting of existing buildings — like the new program in Florida — and sensible land use planning are effective,” Racicot stated. “These and other loss prevention tools can make the difference between a community recovering relatively quickly from disaster — with citizens returning to homes and jobs — and a community remaining devastated and economically stagnant for many months or longer.”
AIA also supports regulatory and legal reforms to improve the stability of insurers’ operating environment.
“Too often, state regulation of insurance has become captive to political pressures that hold down premiums in risky coastal areas,” explained Racicot. “True risk-based pricing encourages responsible behavior and discourages dangerous behavior among consumers. It also meets the test of basic fairness.”
AIA also agrees that tax incentives encourage individuals to take more responsibility for hurricane preparation and response, and, reforms to the National Flood Insurance Program will ensure that the NFIP continues its role in protecting homes and businesses.
“The storms seasons of 2004 and 2005 have shown that state and federal governments are already in the disaster insurance and recovery business, but in a very inefficient way” said PCI’s Heidrich.
“NAMIC realizes that those who live and do business in catastrophe-prone areas will face serious challenges in the years ahead,” NAMIC’s Chamness added. “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.”
Chamness said NAMIC believes market freedom and competitive pricing will lead to innovation in developing solutions to problems relating to disaster insurance and mitigation. Competitive pricing and risk-based underwriting are essential to developing and maintaining a viable disaster insurance market. Mitigation must be an indispensable aspect of any disaster risk management and insurance initiatives. And the National Flood Insurance Program (NFIP) should be maintained but must be reformed.
Source: NAMIC, AIA, PCI