Let Private Markets Handle Most Disasters, Insurers Advise Congress

The best way for the federal government to help property owners recover from a natural disaster is to let private insurers do what they know, except in the case of a megadisaster, when federal aid would be needed.

That was what insurer representatives told the House Financial Services Subcommittee on Housing and Community Opportunity, which held a hearing on whether the country needs a national disaster plan.

According to Chuck Chamness, president and chief executive officer of the National Association of Mutual Insurers, for the vast majority of natural disasters, government need not be involved. “We believe the private insurance, reinsurance, and capital markets can serve as the predominant source of risk management for natural disasters — unless it’s a mega disaster.”

However a catastrophe comparable to the 1906 San Francisco earthquake could potentially exceed private market capacity, he acknowledged. “To prepare for a disaster of this magnitude, it is appropriate for policymakers to consider whether government programs should be created to supplement the supply of private-sector capacity,” Chamness testified.

Other insurer representatives offered similar advice.

In his testimony, American Insurance Association President Marc Racicot urged Congress to take a holistic approach to addressing the problems posed by natural catastrophes.

“The reality is that there are no quick fixes or easy answers to the very difficult challenges we face,” Racicot said.

“Although the property insurance market currently is under stress in several Atlantic and Gulf Coast states, the solution rests in improving, not displacing, private sector ability to serve homeowners and businesses in the path of potential storms. AIA has examined all the interdependent elements of the current system, and we have developed a comprehensive reform package to make sure these elements support, rather than undercut, each other,” Racicot stated.

To the extent government gets involved for megadisasters, such programs would need to be carefully designed to avoid undermining the private insurance market and “distorting public perceptions of the risk associated with living and doing business in disaster-prone areas,” according to NAMIC.

“The question lawmakers ought to be asking is, ‘What mix of policies will maximize the private sector’s ability to provide property insurance in disaster-prone areas while minimizing the risk associated with living and doing business in these areas?'” asked Chamness.

Chamness urged financial incentives to encourage states to adopt and enforce stronger building codes and amending the federal tax code to allow insurers to set aside a portion of premium income in tax-exempt policyholder disaster protection funds ad to allow homeowners to create tax-free catastrophic savings accounts similar to health savings accounts that could be used to pay hurricane deductibles and costs associated with retrofitting properties.

“We view this hearing as part of an important national conversation among policymakers, residential and commercial property owners, academic researchers, and representatives of the insurance, banking, and construction industries since fall 2005 when three major hurricanes — Katrina, Rita and Wilma — struck the Gulf Coast, killing more than 1,400 people and costing more than $180 billion in insured losses and federal disaster relief,” the statement said. “The fact that no major hurricane made landfall in the United States in 2006, despite predictions of a highly turbulent hurricane season in the North Atlantic Ocean, should not diminish our resolve to identify and implement measures to reduce the risks associated with natural disasters and to more effectively manage the economic consequences of future disasters.”

AIA’s Racicot outlined specific measures that Congress and state legislatures can take to increase preparedness for and expedite recovery from devastating natural disasters. The proposals include measures to protect people and property in harm’s way; regulatory and legal reforms to improve the stability of the insurance market; tax incentives for individuals to take a greater role in disaster preparation and response; and National Flood Insurance Program reforms.

Racicot testified today that, “the real threat to coastal populations and property is not insurance; it is hurricanes. Mother Nature is the problem, and she is relentless.”

The AIA leader added that recently introduced bills to repeal the McCarran-Ferguson Act’s limited antitrust exemption for insurers, while couched in the language of the current natural catastrophe insurance debate, are wholly unrelated.

“They will do nothing to improve the availability or affordability of coastal insurance and instead will have a serious and detrimental effect on the markets they purport to assist,” Racicot explained.

“Insurers have done our very best to help make our policyholders whole again following the devastation wrought by Hurricane Katrina – a goal which we have overwhelmingly achieved with nearly all of the claims resolved,” said Racicot.

As of Katrina’s first anniversary last August, more than 95 percent of the 1.1 million homeowners’ claims in Mississippi and Louisiana had been resolved, with fewer than 2 percent of such claims disputed, and approximately $40 billion in claims payments made to policyholders to restore homes, businesses, and vehicles.

“Be assured that insurers are continuing to work very hard to resolve the small percentage of claims that remain outstanding. But we must put the blame game behind us. It is time to move beyond all of our own, separate interests and dedicate our collective energy to pre-disaster prevention and preparedness, as well as post-disaster response and recovery.

“We must act boldly and quickly. We must all remain committed to solutions that guarantee long-term stability in the private markets to protect our economy and, most importantly, to provide certainty to the nation’s insurance consumers,” Racicot concluded.