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Public Policy Analysis & Opinion From redfish and kingfish IIABA expresses a pragmatic approach to disaster risk legislation By Kevin P. Hennosy Well, the Democrats have returned to control of Congress, which can mean only one thing: Insurance Hearings. Early this year, Congress held oversight hearings into the natural disaster, housing and the reinsurance sectors. On March 27, the U.S. House Subcommittee on Housing and Community Opportunity of the Committee on Financial Services conducted a hearing on natural disaster preparation and response. The subcommittee’s interest in the topic stems from the botched public and private sector response to Hurricane Katrina. The new Democratic committee leadership posted a statement on the committee’s Web site which asserts, “A bipartisan consensus seems to have emerged that steps FEMA and HUD have taken to date are not working.” Furthermore, the statement says, “The new Democratic Leadership of the 110th Congress has made response to Hurricanes Katrina, Rita and Wilma a top priority.” Rep. Maxine Waters (D-Cal.) chairs the Subcommittee on Housing and Community Opportunity. On several occasions, Waters has expressed her dissatisfaction with the insurance sector’s response to Gulf Coast policyholders. On February 28, in connection with another hearing, Waters observed: “We will soon reach the two-year anniversary since Hurricanes Katrina, Rita and Wilma devastated the Gulf Coast Region of this country, leaving destroyed homes, businesses and shattered lives. What many of us did not expect was for the insurance industry to abandon so many home owners and business owners because of differences in the interpretation of claims related to wind and water. In fact, as this hearing is being held there are countless numbers of persons in the Gulf Region who have yet to receive any money for insurance claims they may have filed.” Claim denials based on whether damage came from flood, wind or wind-driven water particularly irritate the subcommittee chair: “The Hurricanes Katrina, Wilma and Rita totaled $56.5 billion in losses. The total economic losses associated with Katrina alone are likely to exceed $200 billion. You see, we still have not calculated all of the losses related to the hurricanes. Much of the damage from Katrina was related to flooding, while wind is attributed to other damage. This distinction does not help those who have suffered losses without any funds to rebuild or to start all over again.” The consensus of the Democratic leadership is that, like the 2005 hurricanes or the Northridge Earthquake, natural disasters are issues of national importance that require a federal response. The March 27 hearing began with a panel of members of Congress who represent disaster ravaged districts. Rep. Tim Mahoney (D-Fla.) told the subcommittee about the long-term effects of repeated instances of natural disasters that have hit his district. “Up until the moment Katrina ravaged New Orleans and the Gulf Coast, my district was the single biggest disaster area in the nation with no less than four major hurricanes destroying homes and businesses,” reported the congressman. Mahoney explained that insurance costs are not subject to free market forces that shape other commercial sectors. “As anyone who has ever had a mortgage knows, insurance is a requirement and the payment of your insurance is non negotiable.” According to Mahoney, rising insurance costs, or total lack of coverage have a devastating effect on his constituents. “The toxic cocktail of rising gas prices, skyrocketing property taxes, and exorbitant homeowners insurance costs have created a situation for the first time in our state’s history where we have more people leaving Florida than coming. It is so acute that the real estate industry has a name for these people—‘Half-backs.’” This is the name applied to northern retirees who came to Florida, but ended up moving farther north because they could not afford the rising cost of living that followed several severe hurricanes. Rep. Ginny Brown-Waite (R-Fla.) testified how the rising cost of reinsurance impacts the lives of people who have never heard of reinsurance. “Those representing the reinsurance industry will testify that they have plenty of capacity, but what they won’t tell you is that it is not affordable, warned Brown-Waite. She offered several documentary statistics: “In 2002 in Florida, the cost of reinsurance was 7.1 cents of every dollar a home owner spent on insurance. Just four years later in 2006, reinsurance accounted for 44.5 cents of every dollar home owners spent.” The representative has introduced two pieces of legislation that contain provisions creating a federal role in reinsurance: HR 91, Homeowners’ Insurance Protection Act, and HR 330, the Homeowners Insurance Availability Act. Under HR 91 the federal govern-ment would sell reinsurance policies directly to states—not private insurers—that have established state catastrophe funds. “This approach is more comprehensive and better for our nation because, under this bill, states would have to take responsibility for planning for natural disasters by enacting strong building codes and committing at least 35% of their state funds toward mitigation,” the representative claims. “Under HR 91, states would also have to establish a pass through mechanism, so that any savings insurers realize from my bill are passed on to the consumer, as they should be.” Another approach is established for federal reinsurance in HR 330. This bill would divide the nation into six different regions so that the federal government could sell reinsurance policies to the insurers. This federal fund would be available only if a 1:100 year event or higher occurred, and this reinsurance would be a fraction of the cost, potentially as low as a quarter of current industry costs. The Subcommittee then heard from a panel of insurance industry advocates, which tellingly included the National Association of Insurance Commissioners (NAIC). Unlike the days of the Dingell Hearings in the late 1980s and early 1990s when the NAIC was seated separately from the companies its members regulate, after 12 years of advocating for deregulation, the NAIC is lumped in with insurance trade associations. It is a deserved classification. Florida Insurance Commissioner Kevin McCarty testified on the NAIC’s behalf. McCarty, who chairs an NAIC working group that holds jurisdiction over catastrophic loss recommendations, testified that, “Large natural catastrophes are a national economic problem, not simply a local insurance problem. “Congress and the states need to work together to develop a comprehensive plan today to better manage and mitigate the natural catastrophic events of tomorrow,” McCarty said. His testimony spelled out ways to improve disaster preparedness and first response, risk mitigation through building codes and improved infrastructure, insurance capacity expansion and financial reserving. Commissioner McCarty revived an old proposal for opening the federal treasury to insurers in the form of subsidizing catastrophe reserves though tax waivers. This proposal has never advanced very far in Congress because of both the cost to the treasury and the lack of federal oversight of the reserves through direct solvency oversight. Still the old idea has been revived in HR 164, the Policyholder Disaster Protection Act, introduced by Rep. Bobby Jindal (R-La.). McCarty also mentioned proposals for individual reserve accounts, which allow property owners with financial means to shield personal reserve accounts from taxation—which does nothing for those who cannot afford to set aside funds. The commissioner mentioned the concept of a National Catastrophe Reinsurance Plan, but his comments did little more than gloss over the proposal. The insurance trade association advocates presented dutifully docile introductory statements, without promising support for any course of action. The trade association testimony can be summed up in one statement from a representative of the Independent Insurance Agent and Brokers of America (IIABA): “In short, we welcome all proposals and support any and all reasonable ideas and plans that lead us to a healthy and competitive insurance marketplace in which consumers have choices and companies are vying for their business.” However, Andrew Valdivia, California State National Director for the IIABA, went on to say that it is important that policymakers acknowledge there is a problem. In Valdivia’s opinion the problem relates more to product availability— which leads to affordability issues. Furthermore, the problem is national in scope and beyond state or regional approaches. Therefore, the IIABA supports H.R. 330 and is considering HR 91. The IIABA also paid a rhetorical tip of the hat to Rep. Kendrick Meek (D-Fla.) for introducing H.R. 537, the Catastrophic Disaster Risk and Insurance Commission Act. The association believes that H.R. 537 would help Congress address these issues by establishing a national commission to examine proposals and to make recommendations to help the federal government prepare for and manage natural disasters. It is interesting to note that the kind of activity proposed in H.R. 537 has traditionally been conducted by the NAIC, but the regulators association’s stock has fallen in policy circles over the past 10 years. One has to wonder why the NAIC paid J.C. Watts and Company $160,000 in 2006 to lobby for it on Capitol Hill. Valdivia said, “We believe that such a Commission would be an important first step towards putting together a comprehensive solution, and we urge the Committee to consider this legislation.” The Reinsurance Association of America put forward its venerable spokesperson Frank Nutter to explain that we should all be calm because all is well. Nutter told the subcommittee that the reinsurance industry is financially flush. “As of December 31, 2006, the industry’s claims paying ability and capital base have never been better,” said Nutter. Unlike the IIABA, the RAA seems to be saying there is no problem. “Indeed the capital markets have greatly enhanced reinsurance catastrophe capacity following Hurricane Katrina,” said Nutter. To read the testimony one gets the unsettling feeling that the deaths of 1,836 people, untold hardship and un-totaled billions of dollars in insured and uninsured losses were all quite profitable for the reinsurance sector. This is not something I would be eager to talk about in a New Orleans tavern and then walk to my car.” According to Nutter: “Since late fall 2005, approximately $32 billion in new capital has been raised and committed to the reinsurance market. Of that capital, $10.4 billion was invested in new start-up reinsurance companies; $10.3 billion replenished the capital positions of existing reinsurers; and an additional $5.6 billion was invested in special purpose vehicles, whose investors collaborate to provide extra underwriting capacity to existing reinsurers for property and catastrophe retrocessions and short-tail lines of business. Thus, over $26 billion in new capital has been raised in the reinsur-ance industry since Hurricane Katrina. An additional $5.3 billion was raised in the capital markets in catastrophe bonds for U.S. catastrophe risk.” Happy days are here again! Unless you just happen to own a house in the Faubourg Marigny section of New Orleans: One structure in that area did not flood or suffer catastrophic storm damage and did not generate a single claim. Nevertheless, the annual homeowners insurance premium on the structure increased from $2,100 to $4,600. It’s enough to make a Louisianan start humming “Every Man a King” and wearing “Share Our Wealth” buttons with a radical populist fervor. Still, Nutter’s testimony hammers home the same repetitive message: “The RAA does not believe market conditions warrant the creation of a federal program.” Furthermore, the RAA spokesman asserts, “If policy-makers follow competitive, free market principles, a federal natural disaster reinsur-ance fund is unnecessary.” Of course, if the business of insurance ran on free market principles, would the sector need an antitrust exemption under the McCarran-Ferguson Act? Luckily for Nutter, he was not left to deliver the least credible testimony of the day. Marc Racicot, of the American Insurance Association, delivered testimony that centered on the need to deregulate insurance and otherwise reward carriers with tax breaks as a means to address the problem. Sure thing Marc, I hope it works out for you. The IIABA deserves a Southeastern Louisiana lagniappe for admitting there is a problem and trying to find a solution. * The author |
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