A View From The Press Box

Thank goodness that some in our industry have resisted the idea of a national disaster cat fund. Why on earth would we want to spread the cost of a fundamentally underpriced exposure that does not impact a very large segment of the consuming public. Establishing such a fund most likely would allow insurers and legislators to defer or otherwise lose focus on the kinds of solutions offered up by the AIA and others.

If home prices can rise dramatically in an open market, so too should the price to the consumer to protect that asset against natural disasters if they choose to live in those regions. Providing a subsidy to a beachfront vacation homeowner isn't what insurance is all about.

Let's fix the fundamental problem of building poorly (or at all) in cat-prone areas, not incorporating true risk costs into pricing, so that the consumer is aware of, and bears a greater share of the risk, while allowing insurers and reinsurers the ability to establish adequate cat reserves in their own companies if they choose to be in the business.

Then, and only then, should we address the residual need for some more reasonable national disaster cat fund.

Frank,

You make some excellent points, but couldn't the same argument be made against TRIA--that terrorism is an underpriced risk facing a limited number of target areas? Or are you against TRIA's extension as well?

Sf

I do not think that the comparison to TRIA holds true with respect to the personal responsibility portion of the solution.

As a homeowner in Florida, I can choose to improve my home to make it wind-resistant, or I can even move away from the coast. Whatever decision I make, I should pay my share of the costs for insurance.

I think that is where the AIA proposal is sound, and any solution that allows individuals to avoid personal responsibility for their decisions will have adverse social impacts.

In the case of TRIA, I am not sure that loss mitigation or avoidance at the individual level is practical, nor would it be fair to surcharge people living in NYC or DC for a problem that we all share collectively.

I tend to agree with Werner at the individual level, where I guess the comparable option would be to leave the country to avoid the risk.

Also, a terrorist act is an act against all of us in a different sense. Our politicians consider us at war with a different kind of enemy. In war especially, we are the UNITED States, and our risk and loss has always been shared.

That said, larger corporations and real estate developers do have a greater responsibility to build safer high rises and otherwise mitigate business risk than they had considered in the past. And this responsibility needs to be considered as part of any TRIA extension.

I was pretty confused, apparently like a lot of other people, about how a catastrophe fund would work and if it would result in my clients having to subsidize those residing in disaster-prone areas.

The fact is, H.R. 4366 specifically states that in order for a state cat fund to qualify for backing by the federal fund, the rates for the state fund must be actuarially sound, and that there be no cross-subsidies between one line of coverage and another.

It seems to me that if there were an ultimate reinsurance facility that would cap high-end exposures, rates for homeowners would be tempered because we wouldn't have to rely on unlimited traditional reinsurance at ever-escalating prices.

The idea of a cat fund earning tax-free interest, whose resources were used to cap mega-exposures, and whose earnings could help enforce better building codes, land use and emergency response programs makes enormous sense.

Frankly, it is an embarrassment to the industry that there is a shouting match going on over such an important national issue.

Alexis Neuman

We have been spared, so far, during this hurricane season. There has been relatively little activity in the Gulf and Atlantic states. But, as we all know, that could change in an instant.

The current split in the insurance industry is doing little except preserving the status quo--a status quo that relies on lots of luck, unlimited exposure and consumers who are confronted with larger premiums and fewer choices.

There seems to be universal agreement on the need for better planning, tougher building codes, better enforcement and more effective response mechanisms.

But the only proposal that offers any hope for funding those kinds of programs is HR 4366, which would allow a small portion of the investment earnings of a state-sanctioned private catastrophe fund to be used as an on-going source of funds for those programs.

For the industry as a whole, the comprehensive solution offered in HR 4366 would provide a needed degree of certainty with respect to the cost of reinsurance, would strictly prohibit subsidies between lines of insurance and--because state cat fund rates would be required to be risk-based--would eliminate unfair and costly subsidies between residents of high-risk and low-risk regions.

The so-called split in the industry may not be as substantial as has been portrayed. The two largest writers of homeowners' coverage are already on board with HR 4366, as are more than 100 first responder organizations, small and large businesses and a host of other groups concerned about how America prepares and protects itself from the onslaught of catastrophes.

It would be truly catastrophic if the industry remained divided, the status quo were preserved and a massive hurricane struck or earthquake rocked this nation.

Pete McDonough

Your editorial concerning "An Industry Divided" was, as always, interesting.

Robert P. Hartwig, executive vice president and chief economist of the Insurance Information Institute, gave an excellent presentation at the annual NAMIC convention last week.

The information given concerning natural disasters was fact-based and very much supports AIA's position that natural disaster coverage honesty reflects the higher risk and cost.

Many of us in the Midwest without the ocean view are fed up with subsidizing the poor folks along the coast through increased reinsurance costs, state and federal taxes, etc.

Mr. Hartwig's complete session is available at http://namic.org/topnews/060922st2.asp.