Public Policy Analysis & Opinion

Whose side are you on?

Sandy calls the question for state regulators

By Kevin P. Hennosy

The collective response of Northeastern state insurance regulators to the "super-storm" formerly known as "Hurricane" Sandy was remarkable for its uniformity and efficiency. In addition, the state response clearly benefited insurance consumers at the short-term expense of insurance carriers.

Someone send Satan a coat because his fiery protectorate has surely frozen over.

Nearly concurrent with the first bands of rain hitting the Jersey Shore, state governors and insurance commissioners opined that insurance carriers could not trigger "hurricane deductible" provisions of homeowners insurance policies.

Officials argued that the since the National Weather Service had not issued a hurricane warning for any jurisdiction in the Northeast, insurance carriers could not execute the extraordinary deductible provisions contained in many homeowners policies.

State officials' collective response to the insurance-related impact of the storm was both vigorous and beneficial to consumers. In particular, the uniform and immediate decision to order insurers to waive the hurricane deductible provision claims against policies will ease policy- holders' sense of insecurity.

In announcing the decision on October 31, 2012, New York Governor Andrew Cuomo explained the importance of the action:

"Many homeowners' insurance policies for homes located in downstate areas contain hurricane deductibles based on a percentage of a property's insured value. These deductibles typically range from 1% of a home's insured value to 5%. So, for example, with a 5% deductible on a home insured for $300,000, the home owner would have to pay for the first $15,000 of damage."

In addition to the direct impact of such an expense on personal finances, the deductible serves to hinder economic recovery after a storm.

If consumers need to spend savings, or secure financing for the deductible before moving forward with repairs, it denies counter-cyclical spending that local economies need after suffering a severe weather event.

In a November 1, 2012, statement, Pennsylvania Governor Tom Corbett praised the insurers' response, saying, "Insurance deductibles could have added significant costs to Pennsylvanians already struggling to clean up and rebuild after Hurricane Sandy. Insurance companies have deployed catastrophe teams to Pennsylvania, and they have been advised that hurricane deductibles should not be applied to any homeowner's insurance claims."

As a fellow citizen who lives in a region of the country that is prone to tornados and ice storms, I am pleased to see state officials step in on the side of those injured by the storm. On a human level, state officials made the right call.

Yet, the regulatory action does raise important public policy concerns. The decision to waive extraordinary deductible provisions introduces an arbitrary element to the execution of insurance contracts. If there was no material, risk-based, reason to establish extraordinary deductible provisions in homeowners policies, why did state regulators approve them in the first place? Will meteorologists in the future feel restrained in upgrading storms to "named" or "hurricane" status based on the knowledge that their decision could cost individuals billions of dollars?

State insurance regulators are rarely associated with the terms "uniformity" and "efficiency"—with the notable exception of forming lines in front of bartenders at National Association of Insurance Commissioners (NAIC) Opening Receptions.

Remember, state insurance regulators could not agree whether it was prudent to remove Civil War Era mortality data from life insurance actuarial tables, until the late 1960s. The regulators had a very hard time figuring the probability of when another Gettysburg might just pop up out of nowhere.

So, the uniform action, in the public interest, by state insurance regulators brings to mind various parables from statistical theory, beginning with "the infinite number of monkeys typing all the great works of literature."

The consumer-orientation of Northeastern officials' action stands in stark contrast to Gulf Coast officials' response to Hurricane Katrina in 2005. Following Hurricane Katrina, residents and business owners of the Gulf Coast felt abused by insurance carriers. The vaunted system of state-based insurance regulation did nothing much to stop it.

From the viewpoint of Gulf Coast policyholders, insurance carriers behaved toward customers in the wake of the storm like cats playing with prey—never applying a mortal blow but merely tormenting for entertainment purposes before they expire. During several visits to the region following the killer-storm, I met numerous victims of the storm who felt victimized by the insurance companies to which they had transferred their risk of financial loss.

Home owners told me of being bullied into accepting partial payment of covered claims in order to avoid time-consuming litigation. Or they were told claims for water damage were denied because the property owner could not prove that the water did not come "up from the sea rather than down from the sky."

Business owners in New Orleans complained of business interruption policies being ignored because a mayor, whose only qualification for office was his puppet-like sensitivity to the business community, had not issued a mandatory evacuation in a "mandatory-enough" manner.

When I asked whether the aggrieved policyholders received help from state insurance regulators in the region, few knew that there was such a beast. Others just looked at me and said: "They [the regulators] are on their [the insurance carriers] side."

Gulf Coast officials, who were at least charged with insurance regulation, zipped around in vehicles mugging for TV cameras. The regulators "deployed" department staff to "process" complaint forms from policy- holders. But what really happened? Southern conservative insurance regulators let the carriers do whatever they wanted, and producers were left to deal with upset customers.

Good Night, Irene

The political culture of the Northeast is not as masochistic as that of the Gulf Coast. State officials' response to Hurricane Irene telegraphed what Northeastern consumers—and voters—expected from their state officials.

In August 2011, Hurricane Irene scraped along the East Coast generating billions of dollars in claims. States like Maryland and New York quickly issued bulletins "reminding" insurers that the storm had not reached the certified level of strength required by regulations in those jurisdictions to apply the extraordinary deductibles. For instance, at the time, New York rules required that the National Weather Service must deem a storm to reach Category One on the Saffir-Simpson Hurricane Wind Scale.

Yet, by the time that the storm hit Connecticut, it had weakened significantly. Nevertheless, a 2009 Connecticut regulation with the active participation of various lobbying arms of insurance carriers provided an extension of the extraordinary deductibles to claims suffered 24 hours after a storm warning is downgraded or canceled.

Based on contemporary news reports, Connecticut insurance regulators received complaints from home owners who were informed of the application of the extraordinary deductibles to their claims. The regulators began making contacts with insurers, urging them to waive the deductible —and not informing the carriers that the deductible was not applicable.

By the first week in September, news outlets carried a series of stories reporting that insurance carriers were agreeing to "waive" the hurricane deductible provisions of their policies. Thirteen companies acknowledged that Irene surpassed internal triggers for the application of extraordinary deductibles but agreed to waive the requirement: ACE, Fireman's Fund, Hartford, Liberty Mutual, MiddleOak, Nationwide, New London County Mutual, Safeco, Tower, Travelers, Utica National, Utica First and Vermont Mutual. In addition, news reports from the time noted that Chubb, Hanover, Kemper and Peerless, did not apply the extraordinary deductibles because the storm did not exceed the companies' own rules.

While Connecticut regulators achieved material success through discussions with insurance carriers, they still sought persuasion—not compliance. Traditionally, insurance regulators call this type of activity "jawboning."

The Behemoth of Bloomington, State Farm Mutual Automobile Insurance Co., a prominent poster-child for application of federal antitrust laws to the business of insurance, chose to resist Connecticut's jawboning. State Farm does not do what State Farm does not want to do.

As a mutual company, State Farm is theoretically owned by its policyholders. Of course, in modern business, ownership and control are often two very different concepts. For example, it seems to be beyond the control of policyholders/owners to hire a CEO who does not have the last name "Rust."

While one can detest the arrogance exerted by State Farm in what passes for a competitive marketplace, the company rarely makes a legal mistake. If the state regulators had a legal leg to stand on, the company would have complied with the request to waive extraordinary deductibles following Irene.

A Wall Street Journal article dated September 17, 2011, reported the results of an interview with Robert Hartwig of the Insurance Information Institute (III). Without naming any particular companies, Hartwig explained that "some carriers are concerned that waiving the deductibles in Connecticut could set a precedent that haunts them in other states."

The new precedent appears set.

After Hurricane Irene, a number of states tweaked the rules that govern the application of extraordinary deductibles. The Hurricane Irene experience seemed to shape the greater regulatory response to the storm formally known as Hurricane Sandy.

In the early days following the "Super-storm" Sandy, insurance regulators in the Northeast proved a different breed. They allowed no time for insurers to establish control over the claims payment process.

While this quick action is laudable from a consumer perspective, the public policy still appears based on the writings of George Orwell. We cannot call the storms "hurricanes." In order to secure payment and recovery for countless policyholders and communities, they are "super-storms," or "post-tropical depressions."

Even in states where regulations provide clear guidance based on established weather scales, the logic seems to arise from Franz Kafka, who worked for an insurance company when he was not making invaluable contributions to Western literature.

The weight of risk appears to play little role in shaping the price and provisions of risk of financial loss faced by home owners. Somehow, a home owner who suffers a storm loss caused by sustained winds of 74 miles per hour—or, more correctly, recorded sustained winds of 74 miles per hour—is due thousands of dollars less from insurance claims than the policyholder whose home is buffeted by recorded sustained winds of 73 miles per hour. Yet, a policyholder whose home is battered by 120-mile-per-hour sustained winds during a hurricane can expect the same deductible as the victim of the 74-mile-per-hour sustained winds. Furthermore, a Missourian whose home is destroyed by 200-mile-per-hour winds should not suffer extraordinary deductibles. Thank you, Mr. Kafka.

Inconvenient

In September 2005, the NAIC planned to convene for a national meeting. The agenda for that meeting carried two particularly interesting sessions. A working group would hear testimony from Florida consumers, who following several hurricanes were outraged by the response of the Federal Emergency Management Agency (FEMA), which was then administered by Michael Brown. In addition, former Vice President Al Gore was scheduled to make a presentation on climate change. The meeting was scheduled for New Orleans. The NAIC canceled the meeting after Hurricane Katrina battered and flooded the city.

With the clearly documented effects of climate change, extreme weather events have become more common and that trend is expected to increase. The increased frequency and scope of these weather events will impact the bottom line of insurance carriers and the economy as a whole.

The economic drag of storms and other natural events has always slowed the national economy; however, as major events increase in frequency and scope, it will become more difficult for the economy to recover. We may easily experience "storm recessions," which will require countercyclical spending to ignite economic recovery.

Private insurance coverage will continue be a vital source of recovery funds. Those funds will continue to provide liquidity for personal finance and recovery. As claimants spend those funds, the economy receives the kind of countercyclical boost that is necessary for national recovery.

If claimants lose access to these funds, or are afraid to claim the funds, or cannot claim the funds before they come up with a huge stake with which to cover the deductible, that recovery will not happen.

We should not rely on state officials to play arbitrary word games in order to provide access to needed recovery funds. Reason seems to dictate that the risk of loss involving the general economy of a region should be spread over the population as a whole.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.