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Critical Issue Report Natural disasters—It's only a matter of time Consumers, Congress, industry associations disagree By Phil Zinkewicz
A great deal of attention is still being paid to last year’s Hurricane Katrina, in the printed press, on television and at insurance industry meetings and symposiums across the country. Small wonder. Katrina was the most expensive and most devastating natural catastrophe in the insurance industry’s history. If the four hurricanes that hit the southern part of the United States in 2004 were not a wakeup call, Katrina certainly was. But waking up to a problem is one thing. Rubbing our eyes and clearing out the sleep dust is another. While just about everyone agrees that we should have some sort of catastrophe plan in place for future natural catastrophes—tropical storms, earthquakes, tornadoes, ice storms, you name it—there is as yet no general consensus as to what that plan should be. In fact, insurance interests, regulators, legislators and the public itself are all over the place as to what should be done. Consider a recent poll conducted by the Insurance Information Network of California (IINC) and Fireman’s Fund Insurance Co. We have reached the 100th anniversary of the great San Francisco earthquake of 1906. Yet the poll showed that only 22% of Californians consider themselves to be prepared or very prepared for a disaster in their area. Nearly half singled out “common sense” as the reason to prepare for disaster, but they noted few incentives that would motivate them to be ready for future earthquakes, floods or fires. The largest segment of respondents to the poll—only 10%—cited a local disaster as the reason to prepare for future risk. No other possible motivation—from financial incentives to educational programs—was acknowledged by more than 9% of those polled.
“Californians are in conflict about disaster preparedness,” says IINC Executive Director Candysse Miller. “They recognize risk, but they often assume it will happen to someone else. They acknowledge that they aren’t prepared, but they can’t find the motivation to strap their water heaters, clear dry brush or prepare a home inventory.” In the wake of Hurricane Katrina, Californians also do not believe that they should count on government to bail them out financially after the next catastrophe. Many respondents indicated, however, that government should play a role in the preparation for and recovery after a catastrophe, reports Candysse. “Clearly, it is critical for us as an industry to find ways to encourage consumers to get better prepared for natural disasters—both physically and financially,” explains Chris Heidrick, vice president for personal insurance at Fireman’s Fund. The survey, which polled 800 residents across the state, also found that Californians ultimately consider it their own responsibility to be financially prepared for disaster. Among the findings: • Sixty percent believe that there is more than a 10% chance of a catastrophe in their area in the next five years. • Sixty-eight percent of those surveyed indicated that they rely on the insurance industry to help home and business owners rebuild after a disaster. • Sixty-nine percent said that it is a home or business owner’s responsibility to purchase adequate insurance or have savings set aside for emergencies, and that they should not rely on government or others to assist them in rebuilding following a catastrophe. • Only 20% believed that government financial assistance would see them through disaster recovery. “People have a responsibility for what they do,” said one respondent, a 49-year-old Ventura County man. “You have to get down to business, protect your family and plan for bad things to happen.” The attitude of those respondents is all well and good, if the insurance industry is willing to help them prepare financially. However, following Hurricane Katrina, many property/casualty insurers began nervously looking around for the nearest exit doors. New York is not particularly prone to high-magnitude tropical storms, but after Katrina, Allstate announced that it would not renew some policies in certain areas of the state where the risk of severe windstorms is apparent. In Louisiana and Mississippi, property/casualty insurance agents are watching the market closely in anticipation of some insurers exiting parts of the marketplace. And, insurers are now watching other parts of the country where catastrophic occurrences might further diminish their coffers. It’s not easy to prepare financially for a natural catastrophe when insurers are just not selling the products. Therefore, sectors of the business are examining other methods of catastrophe preparedness and not relying solely on the private sector. Recently, Former FEMA Director James Lee Witt and former Department of Homeland Security Deputy Secretary Admiral James M. Loy (USCG Ret.) announced the formation of a national coalition, which they said would help American families become better prepared and protected from the ravages of natural catastrophes and their economic consequences. The coalition, ProtectingAmerica.org (www.protectingamerica.org), an organization of emergency manage-ment officials, first respondents, disaster relief experts, insurers and others, also released the findings of a national survey that found that nearly half of all Americans feel personally vulnerable to a major natural catastrophe. The survey of 1,000 registered voters was conducted by The Mellman Group and Public Opinion Strategies. It also found that 70% of respondents say the country is still not prepared to deal with catastrophe and that they support Congressional action to reduce the financial and economic consequences of a catastrophe. “The catastrophes of the last hurricane season were a wakeup call to America, and this survey is a wakeup call to Congress,” Witt says. “By a margin of nearly three to one, Americans are saying ‘we’re not prepared and we want the Congress to do something about it.’” According to Admiral Loy: “The likelihood of ever more fierce hurricanes making landfall anywhere from the Gulf Coast to New England, the 100th anniversary of the San Francisco earthquake, and the ever-menacing possibility of a replay of the New Madrid earthquakes in the American Heartland are fueling an understandable and responsible call to action on the part of the American people. This coalition has come together to push for the enactment of an integrated local, state and national solution that helps America be better prepared for catastrophe.” At the core of ProtectingAmer-ica.org’s mission is the establishment of a comprehensive, national catastrophe management solution that will increase public awareness through improved education; allow for better coordination with state, federal and local mitigation and recovery efforts; strengthen emergency response and improve financial mechanisms to rebuild after a major catastrophe. The coalition is supporting the enactment of state and national programs that would include privately financed catastrophe funds as backstops to the private insurance market. These funds would be financed by deposits from private insurance companies, and interest earnings would be exempt from taxes. The funds’ private deposits and the majority of the earnings could be used only to cover replacement and rebuilding costs following major catastrophic events. Legislation (H.R. 4366) that would establish a privately funded national catastrophe fund that would serve as a backup to state catastrophe funds has been introduced in the Congress by a bipartisan team of representatives from Florida, New York and Michigan, says the coalition. The sponsor of the proposed legislation is Rep. Ginny Brown-Waite (R-Fla.), who says: “Natural catastrophes are national problems that need national solutions. This isn’t about earthquakes on the West Coast or hurricanes on the East Coast. It’s about natural catastrophes that can strike virtually anywhere in America. Implementing a natural catastrophe insurance fund will help local commun-ities recover quickly and efficiently from the next natural disaster.” The Independent Insurance Agents and Brokers of America (IIABA) also supports a federal role in catastrophe preparedness. However, its approach would be the establishment of a federal reinsurance backup for private insurers, similar to TRIA. Charles Symington, the IIABA’s senior vice president of government affairs and federal relations, says: “Natural catastrophes are not just a coastal state problem, but a national problem. Other solutions besides a federal reinsurance backup have been proposed. Some are proposing that the private sector offer catastrophe savings accounts to residents in disaster-prone areas. We are very flexible in considering these proposals. Our focus is, if the solution can increase availability and affordability of insurance in catastrophe-prone areas, we will consider it carefully. But we have to get moving. The next hurricane season is not far away, and Congress has a reputation of moving very slowly.” Julie Rochman, senior vice president of public affairs for the American Insurance Association (AIA) takes a different view. “We do not support ProjectingAmerica.org or other proposals that call for federal involvement in catastrophe preparedness. We believe that the private sector still has the capacity of handling catastrophe exposures, providing there is state and federal legislation that gives us risk-based pricing and product flexibility.” So, as stated earlier, the insurance industry, the public and legislators are all over the place on the issue of catastrophe preparedness. As the hurricane season approaches, it is questionable whether any of these approaches will be in place. * |
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