New York, Jan. 10, 2006 – Unless the nation changes the way it addresses major catastrophes, the next hurricane or earthquake will wreak far more economic devastation than Hurricane Katrina, insurance industry leaders told executives at the 10th annual Joint Industry Forum, held here.
The panelists agreed that regulatory constraints keep rates artificially low and encourage development in high risk areas such as Florida; in effect, forcing homeowners and taxpayers to subsidize wealthy owners of waterfront properties.
“People are willing to pay high prices for homes in coastal areas, but are not willing to pay the real cost of insuring them,” said W.G. Jurgensen, chief executive officer, Nationwide. “Florida is a one of a kind; a geographical anomaly,” he said. “If the state is going to continue to attract new residents, it will have to make them pay for the view. You can’t ask those living in low risk areas to subsidize West Palm Beach.”
Insurers have had decades of profits wiped out by Hurricane Katrina and are pulling back from writing insurance in high risk locations, according to Frederick H. Eppinger, president and CEO, The Hanover Insurance Group. “Into this supply breach have stepped under-capitalized start-up companies, many of which could become insolvent in the event of a mega-disaster. Meanwhile, the cheap rates they offer drive responsible, established carriers out of the market.”
According to Eppinger, thoughtful companies are pulling back from the market. “Undercapitalized companies will fill the gap,” he said. “The question is will they have enough cash when needed to pay claims?”
Edward M. Liddy, chairman, president and chief executive officer, Allstate, said the 2005 hurricane season has raised awareness of the need for a plan to deal with mega-catastrophes. “The solution is a private program sponsored by the government under which rates for homeowners would be actuarially sound,” he said. “States would create pools funded by all entities that benefit from a robust local economy such as the banking and real estate sectors. The key is to pre-fund the cost of reconstruction after a catastrophe.”
Liddy called for a federal program to back up the pools in early years, before adequate funds can be accumulated.
Brian O’Hara, president and CEO, XL Capital Ltd., said he was wary of getting the federal government involved. “Ratemaking controls at the state level prevent the real costs from being included in premiums. True free markets would go a long way to solving the problem of funding catastrophes.”
CEOs talked about the emotional toll the 2005 catastrophes took on their teams of claims adjusters, calling them heroes. They described how some adjusters had lost everything they had to the storms, but worked 24/7 to settle their neighbors’ claims.
Edward B. Rust Jr., chairman and CEO, State Farm, observed that new technology helped his company provide policyholders with better services. “Satellite imagery now allows us to quickly identify damaged properties so that we can issue checks to policyholders even before we’ve had a chance to visit their homes.”
CEOs voiced concern about the number of underinsured and uninsured homes and businesses in the Gulf States, a problem which is at the root of legal challenges regarding insurance contracts. There was general agreement that litigants would not prevail.
“This goes to the heart of the sanctity of contract law in the U.S,” said Ronald R. Pressman, chairman, president and CEO, GE Insurance Solutions.
On the wind versus flood issue, Pressman called for educating consumers on the importance of adequate coverage and urged the industry to “think about this educational effort as a long term investment.”
The panel discussion was moderated by Charles M. Chamness, president, National Association of Mutual Insurance Companies.
The Property/Casualty Insurance Joint Industry Forum was created to provide leaders form the widest spectrum of the p/c insurance and reinsurance industry with an opportunity to meet with each other in discussion of topics of general interest.
The sponsoring organizations of the Forum represent a wide spectrum of insurance interests and audiences. They include: ACORD, American Institute for Chartered Property Casualty Underwriters, The Geneva Association, Institute for Business & Home Safety, Insurance Information Institute, Insurance Institute for Highway Safety, International Insurance Society, Inc., ISO, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, National Insurance Crime Bureau, Property Casualty Insurers Association of America and Reinsurance Association of America.