Weather Catastrophes trigger debate on insurance: Industry divided on shouldering cost
By Eileen Alt Powell
Published November 21, 2005
Insurers' willingness to provide coverage is pivotal to how well New Orleans and other areas recover from the devastation wrought by Katrina and other hurricanes.
But some insurers intent on limiting future losses are considering pulling out of the Gulf Coast or reducing the number of customers they serve, just as insurers have done in Florida over the past decade.
It's an issue with implications well beyond hurricane regions. No part of the nation is exempt from the possibility of a financially devastating catastrophe, whether it be a terror attack or a killer storm.
Businesses and homeowners across the country are feeling the impact of the insurance industry's problems, including higher premiums and deductibles, while insurers recoup hundreds of billions of dollars in losses from this year's storms.
Longer term, the question is whether the insurance industry can continue to absorb such massive losses without some federal guarantees or state reinsurance pools.
It's a serious concern because insurance is critical to the functioning of the economy.
"If you can't get insurance, you can't borrow money, you can't build inventory, you can't protect your workers, you can't exist," said Mark Drennen, president and chief executive of Greater New Orleans Inc., the city's economic development group.
There are a handful of specialized disaster insurance programs available. For example, the Sept. 11 terrorist attacks in New York and Washington prompted Congress to enact the Terrorism Risk Insurance Act, which would provide funds to the insurance industry if there are devastating terror attacks in the future. But the program expires at year's end, and several congressional committees are debating terms for its renewal.
When it comes to natural disasters, there are programs such as federal flood insurance and California earthquake coverage but no comprehensive backup to deal with megacatastrophes.
To be sure, the U.S. insurance industry is not poor. The industry had a surplus of about $400 billion before Katrina struck.
But Ernie Csiszar, president and chief executive of the Property Casualty Insurers Association of America trade group, said this year's storms could wipe out one-fifth of that.
He added that estimates of the potential damage caused by a massive earthquake in San Francisco indicate "it is not beyond the realm of belief to think it would be a $400 billion catastrophe," the equivalent of the industry's surplus.
Insurers are divided on whether the industry can or should shoulder all the risk.
Craig Poulton, whose company, Poulton Associates Inc. in Salt Lake City, writes flood, landslide and earthquake insurance, believes private companies should be able to handle natural disaster coverage.
But to do so, policies must be priced to reflect the real risk of potential disasters and coupled with solid building and land-use codes designed to mitigate catastrophic damage. He doesn't believe that's been the case in hurricane-prone areas.
"They haven't been charging those people enough money," Poulton said. "In effect, you and I have been subsidizing people who live in Florida and the Gulf Coast. Our premiums go up so they can rebuild their homes every nine years."
State insurance commissioners, however, say the current system isn't working. Disputes over policy coverage and delays in payouts are slowing rebuilding in New Orleans and other areas, making the region more dependent on federal emergency aid and reconstruction money. And it remains unclear whether homeowners and businesses will be able to buy adequate coverage if they do rebuild.
California Insurance Commissioner John Garamendi, who hosted a meeting in San Francisco last week to discuss creation of a national catastrophe insurance program, argues that massive disasters "cannot effectively be dealt with by existing insurance policies or federal emergency aid."
Csiszar said there are mechanisms the industry could try to adopt, such as issuing catastrophe bonds or the creation of private catastrophe pools, to try to prepare for a megadisaster, but these likely would require hard-to-win changes in tax and accounting rules.
State catastrophe funds, perhaps backed by a federal fund, also could work, he said.
"In every case, you're going to have an uphill battle to recognize this is an issue, and that doesn't apply just to politicians," Csiszar said. "We tend to forget about these things as time goes by."
Even if there is a move toward a national program, it won't work unless more is done to make sure structures are built to withstand major storms.
J. Robert Hunter, a former Texas insurance commissioner who now works with the Consumer Federation of America advocacy group in Washington, has argued against renewal of the federal terrorism program and cautioned against anything similar for natural disasters.
"The risk to taxpayers under such a program is that it will unjustifiably subsidize the insurance industry or encourage faulty construction in areas at high risk for natural disaster," he argued.
There are many who believe that a partial solution to the problem is to change building codes in step with insurance coverage.
Tom Murphy, chairman and chief executive of Miami-based Coastal Construction, a contracting firm that specializes in condominiums and office buildings, said changes in Florida's building code since Hurricane Andrew in 1992 have led to homes and offices that better withstand hurricanes.
When Hurricanes Rita and Wilma hit Florida, his firm had some 2,000 condominium units under construction with about 15,000 panels of glass, and "we didn't have one single failure." Murphy said.
"I have to say, the way these buildings performed, insurance shouldn't be an issue."
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