Let's give our lawmakers a break. The insurance industry should be appreciative that they threw us a bone with the extension of TRIA. We can't expect our congressmen to consider another insurance-related issue this year, a national catastrophe fund. Just think of all the paid golf trips, all-you-can-eat lunches, glad-handing and president-bashing they have to do this election year.
Actually, we shouldn't trouble reps and senators at all, ever, with such a complicated and significant project as a national strategy for coping with inevitable natural disasters. Such long-term planning is beyond them, unless you catch them in the perfect moment. Our chance was last September after Katrina, when Rita was roaring toward Houston.
Now that we've excused Congress from the hard work, should we just cross our fingers for no landfalls in 2006? Tiptoe lest we jangle the Earth's plates and unleash an earthquake in New Madrid or San Francisco? Give up completely on a national catastrophe fund?
My plan, if I were Re-Man, master of the insurance universe, would be to do just that--banish the thought of a natural CAT fund.
First, I'd raise the costs of a handshake at Baden-Baden and Monte Carlo, and strike the fear of God into property carriers. Let their commercial prices skyrocket. Let their terms be riddled with exclusions, their premiums put in a vice between limits and deductibles. Let them run afoul of state regulators and their political interests. And the carriers then shall flee the shorelines and the fault lines.
They already have, you say? Then good for them! We're not supposed to be building in those places anyway.
Re-Man, you might say next, there are two problems with your strategy--people want to live and work in dangerous, sunny places like Florida and California, and they already do. As an expert on catastrophe insurance recently told me, basically, there's no way around these facts. So a national CAT fund is needed to allow carriers to follow them to the beach.
Yet want and should are two different things. I may want to study Islamic history in Baghdad, but now's not a good time to do it. Blaspheme, Re-Man, war is not the same as people wanting to live in a cosmopolitan San Fran brownstone, or in a beachfront penthouse condo in Miami.
Perhaps, but what will you say when the 1906 earthquake repeats in today's San Francisco, and you're looking at upward of $200 billion in total economic losses, more than 1,000 fatalities and 136,000 refugees?
According to estimates in a recent SwissRe report, there's only a 1 in 20 chance that such a repeat will happen before 2032. But--and this is a big but--there's a two in three shot of some destructive earthquake measuring higher than 6.7 in the area. Do I even need to start talking hurricanes? Global warming? But, Re-Man, that's exactly why we need a nat CAT fund!
No, that's why we need actuarially sound insurance rates. A nat CAT fund would subsidize the irresponsible and dangerous development of apocalypse-prone areas--as well as its reconstruction to "bigger and better" status after said apocalypse hits.
You want to build on the coast? Fine, then please pay out your nose for coverage. If you don't pay, please know full-well you are gambling with your life, business and/or property, and don't expect any handouts when all that is lost.
That leaves our second problem--Miami, San Francisco, St. Louis, and other concentrated areas of property and people in dangerous places. We can't just unbuild them, and when they do get hit by catastrophe--chances are, they will--we can't just let them sit there and rot like New Orleans. We have to rebuild them, Re-Man, and we need this public-private partnership to do it.
Agreed. But instead of having the federal government borrow money from China to fund a national CAT plan, let the risk-transfer world take care of itself. Let insurance act as a brake on greedy development, not just in Florida and California, but all along every coastline and fault line.
When the Big One hits, many victims will flee, never to return. I say good. We're not supposed to build in flood plains or fill up fault lines. Big Ones help us realize this, and should help us reduce our dangerous cities to sizes that are sustainable, safer and insurable for the long term. The quicker we realize this fact of Nature, the better. So sayeth Re-Man.
MATTHEW BRODSKY is associate editor of Risk & Insurance®.
April 15, 2006
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