A Model for Public Policy?

The National Association of Insurance Commissioners Catastrophe Insurance Working Group met during its Spring National Meeting on March 12 to hash out details for a multistate catastrophe fund. During a two-day meeting in Atlanta in February, the commissioners agreed to use modeling to determine the advantage of setting up such a risk pool.

At the heart of the idea, according to Kevin McCarty, Florida insurance commissioner and chairman of the working group, the multistate CAT fund would allow states to pool risk and resources in a tax-free financial structure to provide accessible and affordable insurance for natural catastrophes to consumers.

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Florida recently doubled the size of its own hurricane fund. New Jersey, Massachusetts and Missouri are also considering state CAT funds, according to Pete McDonough, spokesman for ProtectingAmerica.org, a coalition of emergency management officials, businesses, nonprofits and insurers aiming to shape America's response to catastrophes.

These state funds, as with the NAIC idea, McDonough says, are meant to ease the pressure of reinsurance, by making underwriters more willing to write cover in disaster-prone places.

He points to earthquake cover take-up rates in California as proof that high deductibles and premiums are an issue. In 2004, only 14 percent of personal residences had earthquake.

Take-up for commercial quake cover in California is higher than that rate, however, or the rate of commercial policyholders in other quake-prone areas, says Dan Loris, senior vice president, property lines, Zurich's North America commercial businesses.

"A larger customer usually perceives a greater need for earthquake coverage. It would be quite unusual to have a large (insured) ignoring the earthquake exposure in California and going bare," he says. "Unless they can't get the coverage, or unless the pricing is such that they can't afford to pay for it."

The issue of preparing for monster quakes and other disasters, though, is much bigger than insurance take-up rates and CAT funds, says McDonough.

"We think an integrated program of preparedness, preparation and better enforcement of building codes, and better building codes, would be incredibly important," he says.

"Not only for life and safety but for the economy," McDonough adds.

Accordingly, part of ProtectingAmerica.org's program is that state CAT funds, in order to qualify to buy coverage from the proposed federal CAT fund, would need to invest 10 percent to 35 percent of their earnings into long-term disaster planning, first-responders and consumer education programs.

April 1, 2007

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