Multi-State Natural Disaster Insurance Plan Gets Cool Reception

February 22, 2007

Insurance officials in Florida, where a spate of hurricanes have set the industry into turmoil, pitched the idea recently of multistate insurance pools for natural disasters to their colleagues from across the nation.

Reaction was cautious among at least some of the 10 state insurance commissioners gathered in Atlanta for a meeting of the National Association of Insurance Commissioners.

Florida Insurance Commissioner Kevin McCarty has spearheaded efforts to create both national and regional catastrophe plans.

With legislation in Congress still mired after two years, he’s now pushing for smaller, interstate agreements that would include a shared reinsurance pool for disasters like hurricanes, earthquakes and tornadoes.

Reinsurance is a system that allows insurance companies to spread out their losses in the event of major catastrophes.

Through public “catastrophe funds,” governments can help assume some of the risk of natural disasters, with the goal of helping provide more affordable coverage for citizens.

“This is not just an insurance issue,” McCarty said. “It’s an economic recovery issue.”

Florida lawmakers went into special session last month after being bombarded with complaints from residents who saw their homeowners insurance costs soar after the hurricane seasons of 2004 and 2005, which brought eight hurricanes to the state and cost $36 billion in damage.

Some private insurance companies have scaled back the coverage they offer in coastal Florida and have threatened to leave the state entirely.

While acknowledging that similar tragedies could occur in their own states, some officials at the conference expressed reluctance to sign off on pooling insurance money with states more prone to disasters.

Georgia insurance Commissioner John Oxendine said he is leery of any multistate plan that could lead to higher premiums in his state.

“What I’m committed to in Georgia is helping our neighbors and working together, but not having Georgia pay more for the bad experiences in other states,” Oxendine said.

Oxendine said he would be more open to a plan under which states could temporarily loan funds for rebuilding to other states struck by disasters like Hurricane Katrina.

“We don’t mind pooling money and resources together, but we don’t want to be subsidizing,” he said.

McCarty argued that taxpayers throughout the country already are bankrolling recovery costs for natural disasters through funding the Federal Emergency Management Agency and other agencies that respond after the fact.

“We are currently paying for it and we’re paying for it in the most inefficient way,” he said. “We already have a catastrophe policy in the United States — it’s just not a very good one.”

McCarty said his proposal would require policyholders to take reasonable precautions to protect their property from natural disasters and make sure the states involved follow standardized development and land-use plans to cut down on flooding and other risks.

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