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WASHINGTON—Interest in natural catastrophe policy is stirring once again in Washington as hurricane season approaches its midpoint.
But as is usually the case, there is no consensus on what role—if any—the federal government should play. There is even less consensus about how federal policy would and should affect commercial policyholders.
The bills that have been introduced in both houses, both called the Homeowners' Defense Act of 2009, do not address commercial insurance. The bills would allow state-sponsored insurance funds to bundle their catastrophic risks in a new National Catastrophe Consortium, which then could issue financial instruments linked to the catastrophic risks or be reinsured through its members. The federal government would guarantee state funds' bond obligations. It also would establish a federal natural catastrophe reinsurance fund.
Some insurance interests and others working through Washington-based ProtectingAmerica.org support the bill. The organization recently said enacting the Homeowners Defense Act, which includes tornadoes (see box), is crucial to reconstruction efforts after a major hurricane or earthquake.
The economic downturn makes enactment of the measure “even more critical,” James Lee Witt, co-chair of ProtectingAmerica.org and former Federal Emergency Management Agency director, said during a Washington news conference in late July. He said he was “optimistic” the measure would win approval.
What the bill does not do, though, is provide any direct benefit for commercial insurance buyers. A group of commercial policyholders—the National Catastrophe Policyholders Coalition—formed in 2007 to promote policies to improve the availability and affordability of catastrophe insurance (BI, May 14, 2007). Although the group still is “loosely together,” its members are involved more in “information-sharing and monitoring legislation that is out there” than promoting a particular plan, said Jennifer Platt, director-federal government relations in the Washington office of the New York-based International Council of Shopping Centers, one of the coalition's original members.
She said the group's members tried to discern the best solution for commercial policyholders, but “we have yet to come up with a solution that is both economically and politically viable.”
“Certainly commercial policyholders have a stake in the debate,” Ms. Platt said. “However, the current legislation is looking at state funds. There is a difference between commercial policies and residential policies.”
“At this point, without another hurricane breathing down our necks, it's going to be more difficult. The other piece is that property/ casualty insurance is just part of a larger commercial building problem. If you're not able to extend your loan on your property, whether or not you have insurance for it is secondary,” Ms. Platt said.
The ICSC remains hopeful that when Congress deals with financial services regulatory reform, “there will be some discussion of what should be done to protect commercial policyholders in the event of a major catastrophe,” she said.
The Risk & Insurance Management Society Inc. has not taken a position on the Homeowners Defense Act, said Deborah Luthi, director-external affairs for New York-based RIMS and director-enterprise risk management at Matheson Inc. in Sacramento, Calif.
“RIMS has no formal position on the National Homeowners Defense Act as it addresses the needs of homeowners in disaster-prone areas but is silent on the commercial sector's needs,” said Ms. Luthi. “While RIMS might prefer for the commercial sector to be included, and have communicated this preference to congressional offices, we understand the problems with homeowners securing insurance are especially onerous in certain areas of the country. We know that oftentimes homeowners insurance is practically impossible to get at affordable prices after a major event such as a hurricane. RIMS is also aware and sympathetic to some of our chapters in Florida, which have expressed this same sentiment.”
Some observers question whether a federal backstop is needed for either personal lines or commercial lines.
For example, a group of insurers and insurance trade groups, environmental groups, emergency preparedness organizations and free-market think tanks have banded together in the new Washington-based group SaferSmarter.org. Its preferred approach is in risk-mitigation efforts called for in a trio of bills that Rep. Bennie Thompson, D-Miss., introduced earlier this year.
The Pre-Disaster Hazard Mitigation Enhancement Program Act of 2009, the Hazard Mitigation for All Act of 2009 and the First Responder Innovation and Support Act of 2009 encourage mitigation efforts that include increasing the structural integrity of houses and commercial buildings, coordinating the use of natural and man-made storm barriers, giving states incentives to improve their mitigation programs, and identifying and implementing innovative programs for first responders.
Skeptics of the backstop approach called the legislation unneeded.
“This bill displaces a productive private industry,” said Eli Lehrer, senior fellow at the Competitive Enterprise Institute in Washington, which belongs to SmarterSafer.org. “It will do nothing in the long run to actually reduce homeowners' insurance rates, but instead provides a subsidy for unwise development.”
“If you looked at the reinsurance renewals, brokers all had adequate capacity for the catastrophe risks the cedents sought,” said Frank Nutter, president of the Reinsurance Assn. of America, another member of SmarterSafer.org. “Rates were slightly up between 12% and 15%, driven largely by some decline in the capital positions of the reinsurers, but also by the 2008 hurricane season. From our perspective, there continues to be an adequate private market for catastrophe risk and therefore no need for federal program.”
“We've had varying levels of disagreement with and occasional agreement with proposals to create a more straightforward federal backstop,” said Joel Wood, senior vp of the Council of Insurance Agents & Brokers in Washington. “Just as hurricanes don't respect borders, they don't respect commercial vs. residential, but we think the core issue is whether or not actuarially computed reserves equate risk with premium. Florida's public plan is funded by a taxpayer guarantee to make up for inadequate premiums when large claims inevitably occur. We have skepticism but not outright opposition to a federal backstop. Politically, it is a very difficult economic environment to dramatically extend the contingent liabilities of the federal government.”