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Four Pillars for Rebuilding the Coastal Insurance Market

October 22, 2008 Photo
Even though it was three years ago, it feels like Hurricane Katrina happened yesterday. Causing nearly $55 billion in insured losses and 1,518 deaths from Hurricanes Katrina, Rita and Wilma, the 2005 hurricane season won’t be forgotten anytime soon. We were lucky that 2006 and 2007 left U.S. shores virtually unscathed. However, experts warn that we have entered into a period of warming ocean temperature which is likely to increase the size and frequency of catastrophic storms. Sooner or later our luck may run out.

Unfortunately, our nation is not well prepared for the next catastrophic hurricane. Insuring homes along the Atlantic and Gulf coasts has become a serious economic challenge for consumers, policy makers and the insurance industry. It is a challenge that must be addressed. With more than half of all Americans living within 50 miles of the coast, and the value of coastal properties from Texas to Maine nearing $9 trillion—with $2 trillion concentrated in Florida—financial vulnerability to violent storms has increased dramatically.

After a major storm such as Hurricane Katrina, the lack of consistent rules for writing homeowners insurance has been a key factor in driving insurers out of coastal markets, decreasing supply and increasing costs for consumers. From Texas to Maine, insurance companies have cut back on writing coastal homeowners insurance, making it difficult for many to find coverage at an affordable price. In states such as Florida, so many policies have been absorbed by the state-backed residual market that as soon as a big storm hits, the state’s resources will be outstripped by their obligations. Meanwhile, rapid coastal growth and the need for assurances that recovery from a disaster will happen quickly and effectively has inspired policy makers to search for new options.

Driven by marketplace need rather than company need, Travelers has taken a leadership role in developing a comprehensive, private market approach to solving the coastal insurance crisis for homeowners in harm’s way. It is called the Four Pillars Coastal Hurricane Wind Zone Plan. This comprehensive concept reflects input and ideas from across the industry to help create a stable, market-based insurance system that would make catastrophic wind coverage available and affordable without relying on taxpayer financing.
First, the program would provide regulatory consistency and stability by creating four coastal zones from Texas to Maine: Gulf, Florida, Southeast and Northeast. Outside Florida, the zones would span approximately two counties inland. The federal government would provide rate and underwriting regulation within the zones for “named storm” coverage. States would continue to regulate all other perils. The benefits of this limited federal oversight include spreading of risk across state borders, improved insurance availability due to a stable regulatory environment, and reduced reliance on residual markets.

The second pillar relates to rating transparency. Insurance companies would individually and competitively set risk-based and actuarially sound rates using approved standards and certified windstorm risk models. A federal commission would review and validate underlying model assumptions such as frequency, vulnerability and mitigation factors. This would ensure that rates are set with transparency. In addition, Travelers endorses creating a rating calculation mechanism to generate premium credits to customers if models and actual experience become misaligned over time, and to eliminate the possibility that insurers “win” and customers “lose” when the wind doesn’t blow.

The third pillar addresses affordability. Travelers envisions the creation of a cost-based reinsurance mechanism for extreme events, such as an event with losses many times that of Hurricane Katrina. In order to provide financial protection for the unlikely, yet possible, occurrence of multiple events within one year, reinsurance coverage should be applied on a seasonal aggregate basis. The reinsurance would be made available to insurers at cost so there would be no taxpayer subsidy, and insurers would be obligated to pass the savings directly to their customers.

The fourth pillar is mitigation and land use reform. Action must be taken to improve and enforce building codes to make homes stronger to withstand severe weather. Federal guidelines for appropriate building codes and land use planning, with incentives for state and local adoption, plus enhanced construction technology and meaningful premium credits for customers who fortify their homes, will make a significant difference in reducing storm damage and keeping premiums in line.
Travelers’ Four Pillars Coastal Plan would create four coastal zones from Texas to Maine: Gulf, Florida, Southeast and Northeast. The Florida zone includes the entire state; the other three zones would include a pre-determined distance inland all along the Gulf and Atlantic Coasts.

At Travelers, we believe these comprehensive principles provide the needed framework to assist America’s coastal families in preparing to repair, rebuild and recover from the aftermath of named storm catastrophes. We’ve held extensive discussions with key members of Congress, public officials at the state and local level, insurance agents and other industry leaders, and we appreciate the wide range of participants who recognize this as a viable solution to a challenging market problem.

The Four Pillars Coastal Plan

The Four Pillars Coastal Plan is a comprehensive set of principles to provide a market based solution to the coastal property insurance crisis.

The concept is based on “four pillars” that, taken together, focus on facilitating the availability and affordability of private insurance for hurricane and tropical storm wind coverage along the Gulf and Atlantic Coasts.

The “four pillars” include:
  1. A stable and consistent regulatory environment with a uniform set of rules applied to named wind coverage for coastal zones from Texas to Maine. This portion of the homeowner policy would be regulated by an independent federal body with the remainder of the policy still regulated by the states.
  2. Transparency in calculating insurance premiums with risk-based, actuarially sound rates using approved standards and wind risk models, and a rating calculation mechanism to be applied if models and actual experience become misaligned over time.
  3. Federal reinsurance mechanism for extreme events (such as hurricanes causing losses several times greater than those arising out of Hurricane Katrina) with the reinsurance made available to insurers at cost so there would be no taxpayer subsidy, and the savings passed directly to customers.
  4. Encouraging stronger homes through federal guidelines for appropriate building codes and land use planning with incentives for state and local adoption, plus enhanced construction technology and meaningful premium credits for customers who make their homes less vulnerable to wind damage.
Clearly, the catastrophe risk problem is not going to be solved by one state, by one industry, or by one company. Effective and sustainable solutions will have to come from the coordinated efforts of many stakeholders. We’re pleased to have the support of Nationwide Insurance and two major agent associations, the Independent Insurance Agents & Brokers of America and The Council of Insurance Agents and Brokers, all valued partners in finding solutions to current insurance market issues.

More information on the Four Pillars Coastal Plan is available at www.coastalplan.com. With projections of more frequent and severe hurricanes, the next major storm could be right around the corner. Let’s work together to make coastal insurance available and affordable for all who need it before it’s too late.
Patrick McCrink is vice president of Claim Services for Travelers of Florida and president of the Windstorm Insurance Network.
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About The Authors
Patrick McCrink

Patrick McCrink is vice president of Claim Services for Travelers of Florida and president of the Windstorm Insurance Network. 

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