Rep. Baker Scores Regulators Storm Response

BY MATT BRADY
NU Online News Service, Nov. 10, 4:15 p.m. EST

Washington —A member of a House panel scored insurance commissioners for a lack of speed and uniformity in their reaction to Hurricane Katrina and other storms yesterday during a hearing on marketplace issues related to catastrophes.

The criticism came from Rep. Richard Baker, R-La., who chairs the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

The informal session was called to examine the catastrophe effects on the insurance marketplace and insurers’ response to it. Insurance regulators from the storm-battered states of Florida, Mississippi, Alabama, Louisiana and Texas were on hand.

Chairman Baker questioned the commissioners whether the storm had brought any sense of urgency to efforts to establish uniform claims regulations and resolution processes between the states, at least among those along the Gulf Coast.

In response, Mississippi Insurance Commissioner George Dale acknowledged that the states “have got to work better” on such issues, adding that some work is being done now by the National Association of Insurance Commissioners.

Commissioner Dale noted that the NAIC has brought the states to work together since its founding in the late 1800s. In reaction, Rep. Baker said “it seems like we’re working off those same documents from the 1800s” and that he expected “more of a sense of urgency along the Gulf Coast.”

Rep. Baker also questioned whether the states had considered joining together in a form of risk sharing pool.

Louisiana Insurance Commissioner J. Robert Wooley put the issue in context by noting that Florida already has its own catastrophe fund, which prior to Hurricane Wilma at least, has been relatively well funded. It would be especially difficult, he said, to convince Florida citizens that the money they have contributed to the fund should be used to help limit the risk for homeowners in Alabama or any other state.

“Nobody wants to pay for anybody else,” he said, adding that such a system would be even more difficult to establish nationwide. “Nobody in Montana wants to pay more to help keep insurance rates down along the Gulf Coast,” advised Mr. Wooley.

Rep. Paul Kanjorski, D-Penn., commented that establishing a national program will grow even more difficult the further into the past Katrina fades, noting what he called the “loss of sympathy over time.”

The commissioners advised the committee that the federal government could play a role in helping to keep insurance available for those living in vulnerable areas.

“We certainly would advocate a federal backstop,” Florida Insurance Commissioner Kevin McCarty said in response to a question from Rep. Carolyn Maloney, D-N.Y.

Rep. Maloney had questioned whether the federal government could create a program to provide a reinsurance backstop for natural catastrophes along the lines of the federal Terrorism Risk Insurance Act. She said she is considering introducing a measure to accomplish that using language from an unsuccessful bill that was introduced by former Rep. Rick Lazio, R-N.Y.

Commissioner McCarty said lawmakers should permit insurance companies to accumulate tax-deferred catastrophe reserves. If carriers had been allowed to do so after Hurricane Andrew a decade ago, he estimated they would have built up $20-to-$30 billion in reserves by this time.

Much of the discussion at the hearing focused on the role of the National Flood Insurance Program.

Rep. Baker questioned Mr. Dale over Mississippi’s lawsuit attempt to force insurers to cover wind-driven water damage, even though flood losses are specifically excluded from homeowners’ policies and no premiums were collected for the coverage.

Mr. Dale acknowledged that doing so would affect company reserves and that the state “fumbled the ball somewhat.” However, he said the state’s action was the result of “too much confusion” over what sorts of damages are covered by a homeowners’ policy and what weren’t.

The commissioners noted that one of the side effects of the flood program, which does not charge actuarially determined premiums, is that it has in effect encouraged people to live in vulnerable areas.

However, the notion of moving the NFIP toward a more risk-based system raised concerns. Rep. Arthur Davis, D-Ala., noted that if it allowed a risk-based system, Congress would effectively be deciding which communities along the Gulf Coast should be re-built and which shouldn’t, a decision he said would be better made at the local level.

Commissioner McCarty countered, however, that “Congress already decided what areas to build in by establishing the National Flood insurance Program.”

Rep. Davis also questioned the commissioners whether, if the NFIP were eliminated, the private insurance market would step in to fill the gap.

In response, Alabama Insurance Commissioner Walter Bell noted that, “to be able to do that, there would have to be a federal backstop of some sort,” or else coverage would be simply unaffordable in some areas.

Commissioners also spoke concerning the need to establish uniform comprehensive building codes to protect against natural catastrophes. Mr. Bell said that as he was moving through the affected areas, he could tell which buildings had been built since more comprehensive codes had been implemented because they were far less damaged.

Mr. Wooley said the issue has been raised in Louisiana, and will be tackled by the state Legislature during its next session. “I think it’s the responsible thing to do,” he said.