Guest commentary: Significant insurance restructuring needed

WASHINGTON — The devastation of the past hurricane season is still fresh in everyone's mind, and the new hurricane season started Thursday.

In Washington, federal officials are struggling to speed the Gulf Coast recovery. On Capitol Hill, lawmakers are debating what to do with the bankrupt National Flood Insurance Program and ensure that the people who need the coverage actually buy it.

But as the new hurricane season rapidly approaches, wind coverage, not flood coverage, is causing headaches for home and business owners along the Gulf Coast and up the Atlantic Coast from Florida to New England.

With storm forecasters predicting another active hurricane season, a growing number of insurance companies are taking a hard look at their coastal-property exposure and deciding that it is time to cut their losses. Some are not writing any new policies and not renewing existing policies for properties within a half-mile or a mile of the coast.

And companies that are offering wind and catastrophe coverage for coastal properties are doing so at rates so high they take your breath away.

The Council of Insurance Agents & Brokers, which represents the leading commercial-insurance brokers in the United States and abroad, found signs of capacity problems in January in our Commercial Insurance Market Index Survey for fourth-quarter 2005. Brokers responding to the survey reported a sharp drop in the availability of wind coverage, and significant increases in deductibles and policy exclusions.

That trend accelerated in the first quarter of 2006.

"In personal lines, we are just about nonexistent except for the state-run Citizens Insurance Co.," a Florida broker said. "The majority of the market has pulled out or is on standby, getting decisions from management or reinsurers as to proposed action."

So why is this happening, and what, if anything, can be done about it?

First, although the record-setting 2005 hurricane season and the devastation of Hurricanes Katrina, Rita and Wilma along the Gulf Coast will long be remembered, the 2004 season was nasty, too. And the biggest hit taken by insurance companies in both years was from wind damage, not flood damage.

Unlike the National Flood Insurance Program, which offers flood insurance to properties in the greatest danger and does so at a discounted rate, there is no such backstop or government subsidy available to insurers that are being asked to cover wind risks to coastal properties. There is also less reinsurance available to absorb any of their exposure, because reinsurance companies, too, had storm losses in 2004 and 2005.

Some insurers are telling brokers that they expect their reinsurance rates for what catastrophe coverage is available to be 40 to 60 percent higher than last year.

Meanwhile, the various rating agencies are starting to require insurers with catastrophic exposures to increase their surplus capital, so that they are in better financial shape to cover potential losses. When the rating agencies speak, insurers must obey or face the prospect of lowered ratings — which could seriously affect their overall business operations.

On top of that, forecasters suggest that we may be in a new weather pattern that could bring a generation of fiercer, more frequent storms. Many insurers are looking at this trifecta and deciding that it makes more sense not to write any catastrophe coverage at all.

So far, the capacity problem has hit personal-lines insurance hardest, but commercial properties are starting to feel the pinch. A Florida commercial property recently came up for renewal and its owner was told that the insurance premium on the property would soar to $500,000, from $98,000.

We hear of homeowners along the Gulf Coast and in Florida with similar increases.

So the insurers are in a bind, the customer is in a bind, and the insurance brokers are in the middle — trying to come up with a solution to address the needs of both halves of the insurance equation.

One thing insurance brokers can do — and are doing — is work with customers to mitigate exposures and come up with a coverage strategy that will let them secure some wind coverage at more reasonable rates.

For example, there is considerable evidence that shutters or shatter-proof glass on all openings — windows, doors, garages, etc. — can keep the wind from getting into a structure, minimizing the chance that the roof will be blown off and everything inside ruined.

Improved construction codes to increase properties' resistance to major storms, which have been implemented in Florida, are another important step that can be taken.

But in the end, if Gulf and Atlantic Coast home and business owners can't find affordable wind coverage, and with the National Flood Insurance Program bank rupt, one has to wonder if any number of bandages will fix the coastal-insurance problem.

Maybe it's time to consider a more uniform program for catastrophe coverage, in which the federal government steps in as a reinsurer, rather than a subsidizer, and offers help to commercial enterprises and individuals across America.

Under such a plan, the government would require insurers that write property and casualty coverage to offer a uniform all-perils policy to individual and commercial customers. This policy would cover catastrophe losses from wind, flood, and earthquake.

Then, depending on the underwriting data and risk determination for each property, the insurer could decide which risks to pass off to a federal program and which risks to keep.

The insurers would pay a substantial premium if they chose to pass off their risks to the federal program. In calm times, those premium payments from around the country would accumulate and earn interest — building the fund to cover claims from future disasters. But in times of trouble, the fund would be there to cover insured losses from a weather disaster, with no debate over whether it was a flood or a wind loss, and with no coverage gaps caused by conflicts among types of policies.

The immediate benefit of such a program is obvious if you look at the post-Katrina situation. Too often, those customers were left standing on the sidelines — with their homes or businesses in ruins but no payment forthcoming to start the rebuilding — as insurance adjusters squabbled over who was responsible for which loss.

A government all-perils program would get the payment into the hands of customers immediately, so that important economic recovery could begin. Any disputes over who was responsible for what would be fought out at the federal level, without hurting the people who need the help, and need it fast.

Second, this program would address the critical shortcomings of the National Flood Insurance Program that were laid bare by Katrina. The program has limped along since its inception, in 1968, covering claims even though an appalling 50 percent of its annual expenses have been for administrative costs. But the program was never intended to handle a storm as devastating as Hurricane Katrina. The $25 billion in losses from Katrina and Rita bankrupted the program; the government has so far committed another $15 billion in taxpayer money for rebuilding in Louisiana and Mississippi that there is virtually no chance of repaying.

Third, with the government mandating that insurers offer an all-perils policy, there would be no question that people who needed flood insurance would have it. As Katrina showed, that is not the case now. But recent studies also suggest that a shockingly small number of people in California have earthquake coverage; that would also change under this program. And there would be no question that people who needed wind insurance could get it and not be left behind if insurers decided that the coverage was not in their financial interest.

Lastly, a multi-peril program operated by the government would dramatically lower administrative costs, and ensure that the major expenses were not for bureaucratic salaries but, rather, to provide relief to the people who need it.

Critics will of course say that this approach would be unfair to people who don't live in coastal areas or along geologic fault lines.

But many of those people live where tornadoes, other storms, or severe flooding from rivers are common.

As far as taxpayer subsidies go, the people along the Gulf and Atlantic coasts could just as easily point to farm and crop subsidies that go to other states. Plus, it is all taxpayers — not just coastal-property owners — who are on the hook for the $15 billion that the government has already provided to try to bail out the National Flood Insurance Program.

Others will say that this approach would expand, rather than trim, the flood-insurance program. But as we approach another hurricane season with potentially disastrous results, what is the chance that this program will get smaller? Isn't it more likely that the number of flood-insurance policies written by the government will increase, because people have now seen what can happen? And, heaven forbid, if there is another severe hurricane — or several of them — will the government really say, "Too bad — the flood-insurance program is bankrupt and we can't pay your claims"?

The Council of Insurance Agents & Brokers believes that anything short of a massive restructuring to create a federal reinsurance program for flood, wind, and earthquake coverage is simply rearranging the deck chairs on the Titanic. Every taxpayer in this country deserves a better response than that.