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Catastrophe challenges, changes take center stage


NASHVILLE, Tenn.—Catastrophes, their various implications for the insurance industry and how to address them going forward were the focus of much of the discussion during panels and seminars at this year's CPCU Society Annual Meeting and Seminars.

Several participants on a panel on Catastrophes: Challenges and Changes at the meeting last month in Nashville, Tenn., agreed that the recent catastrophe experience in the United States underscores the fact that funding catastrophe recovery is a national issue.

"The world grows smaller every day," said Dennis Gemignani, director of claims and loss control at Pembroke, Bermuda-based Tyco International Ltd. Stressing the importance of critical suppliers, business partners and markets scattered over various locations, Mr. Gemignani said, "Wherever (catastrophe) happens, everybody's affected."

James W. Macdonald, a consultant with Navigant Consulting Inc. in Philadelphia, agreed. "We are one economy," he said, suggesting that a farmer in Iowa must be concerned about the impact a catastrophe might have on markets on the coast.

In terms of funding catastrophes, Mr. Macdonald said, "The insurers will only stay in business to the extent that the return on the risk justifies it."

In the case of natural catastrophes, Mr. Macdonald, who previously was chief underwriting officer of ACE USA, said there is likely sufficient actuarial data to allow private sector insurers to predict most losses accurately and consequently fund all but the very largest natural catastrophe losses.

"On the terrorism side, it is quite the contrary," he said.

Robert L. Ricker, president and executive director of Citizens Property Insurance Corp. in Tallahassee, Fla., took issue with a focus solely on rates in connection with natural catastrophe coverage.

"I think one of the things that the industry needs to be very careful of is this mantra of just rate, rate, rate," Mr. Ricker said. "In Florida, it is a real issue of affordability."

Mr. Macdonald, though, said he sees three key issues in the debate over funding natural catastrophe losses in the United States.

One is the regulatory environment, he said, while another is better enforcement of building codes. The third issue Mr. Macdonald cited is the possibility that some sort of federal natural catastrophe facility might stifle the private sector's development of solutions to catastrophe funding.

David A. Lalonde, senior vp of Boston-based AIR Worldwide Corp., thinks models can help set appropriate rates in catastrophe-prone areas. "In terms of rate, I think it's important to look at the models which are available to provide a long-term view of what rate should be."

Mr. Lalonde suggested there haven't been significant changes in the rates for windstorm coverage that the models would suggest are appropriate following last year's Hurricane Katrina. The models, he said, were providing something close to an appropriate rate prior to Katrina, it's just that in many cases, that rate wasn't being charged.

In seeking to maintain a private market for coastal risks, Mr. Lalonde said, "You can't ask the insurance companies to be the ones to subsidize the rate. there's going to be a subsidy, it should be the government, not the insurance company, doing that."

Mr. Ricker said that allowing insurers' to maintain tax-exempt catastrophe reserves would be a positive step in maintaining a private sector cat market, and Mr. Macdonald noted there are precedents for such tax-exempt treatment, such as Mr. Ricker's company and the California Earthquake Authority.

"You'd have to control it," Mr. Macdonald said. "You'd have to monitor that. But all of that is doable and there are precedents there."

Mr. Lalonde said he thinks one of the most important elements to any catastrophe funding effort is reducing exposures. "I think the one thing that really has to be done is address the risk," he said. "I think mitigation has to be a component of any program."

And Edward Connor, branch chief of the Federal Emergency Management Agency's insurance division, said it's important to make it clear to property owners in catastrophe-prone areas that, while there may be federal disaster assistance after an event, the value of that assistance will represent just a fraction of their loss.

"It is important that everybody understand that yes, FEMA does pay for disaster assistance," Mr. Connor said. "But usually, when you hear these gazillions that are being paid out, they're not for households (or) residences, they're for infrastructure."

"The federal government, more than paying for the loss, must make the argument and explain to people what they must do," Mr. Macdonald said.

David O. VanDelinder, executive director of the Austin-based Independent Agents of Texas, moderated the panel.