Multistate Coastal Insurance Plan Earning Agent, Insurer Support

WASHINGTON, Jul 16, 2008 (A. M. Best via COMTEX) -- TRV | Quote | Chart | News | PowerRating -- The property/casualty industry may be moving closer toward consensus on coastal catastrophe issues, as two major insurers and two of the largest trade groups representing producers have converged in support of an outline for federal action.

Nationwide Mutual Insurance Co., the Independent Insurance Agents & Brokers of America and the Council of Insurance Agents and Brokers have joined with Travelers Cos. Inc. in support of a plan to create a coastal wind zone, stretching from Texas to Maine, with a federal commission set up to enforce a uniform set of rules for coverage of named storms.

The plan is based on a proposal put forward last year by Travelers Chairman Jay S. Fishman in response to several ongoing legislative initiatives to ease the turbulent coastal insurance markets. Originally unveiled at the August 2007 meeting of the American Risk and Insurance Association, Fishman's plan looked to ensure the availability and affordability of homeowners insurance for $7 trillion of property along the Gulf Coast and the Atlantic Seaboard.

But the plan has undergone a few tweaks along the way. Key among the changes included in a plan the groups are calling the "four pillars" is a federal reinsurance mechanism for "extreme" events. Though the reinsurance would be federally administered, it would be fully funded by private insurers who would purchase the coverage ahead of a catastrophe, albeit at rates likely to be lower than those that prevail in the private market.

"That's not something that we originally embraced because, frankly, we saw that the affordability gap was wider than we expected, so we said we had to embrace further ideas to close that affordability gap," Eric Nelson, vice president of risk management for Travelers.

Other "pillars" of the plan include provisions dealing with building codes and other mitigation efforts; specification that only coastal wind coverage would be regulated by the federal commission, with states continuing to regulate the remainder of the policy; and a commitment to "transparency in calculating insurance premiums."

Under that last pillar, Nelson said, though insurers would be permitted to adopt risk-based rates using approved standards and catastrophe models, regulators would track actual claims experience and could order changes, either upward or downward, if the models prove inaccurate over time.

"We believe the models are the best science has to offer to the insurance industry today to set rates, but public policy makers want to make sure that it's fair and appropriate," Nelson said. "So we are unique in that we've come up with a proposal to say, if the models and long-term experience become misaligned, there should be a rating adjustment prospectively provided to customers."

Nelson noted the revised plan has been shared with Senate Banking Committee Chairman Chris Dodd, D-Conn., and Ranking Member Richard Shelby, R-Ala. Travelers hopes it will be included among the options studied by an expert panel proposed by Dodd to examine the coastal insurance crisis. Under language attached to a Senate-passed version of the flood insurance bill, the panel would be granted nine months to craft a plan ensuring the availability and affordability of insurance for catastrophic natural disasters.

Nationwide spokesman Joe Case said the company considered its support for the "four pillars" separate from the all-perils Enhanced Homeowner Insurance Coverage plan it unveiled last month. In its own proposal, homeowners policies would be merged with policies written by the National Flood Insurance Program, with the U.S. Treasury Department regulating the policy and providing reinsurance.

"There was a lot of discussion around how to come to terms and bring Nationwide's philosophy with regard to national catastrophe solutions into the proposal, so we talked quite a bit about what we could agree on," Case said. "At the end of the day, Nationwide is interested in a natural catastrophe solution that is private market-oriented and positions the federal government as kind of a lender of last resort."

Nationwide Group and Travelers Group are, respectively, the fourth- and fifth-largest writers of homeowners multiperil insurance in the United States, according to A.M. Best Co. state/line data based on direct premiums written.

Big I spokeswoman Katie Butler said her group was "supporting the principles (of Travelers' plan) but not any specific proposal." The Big I had previously supported the Homeowners' Defense Act, which passed the U.S. House last November. The bill would allow state-sponsored insurance mechanisms to bundle catastrophic risks in a National Catastrophe Risk Consortium, capitalized through the issuance of catastrophe bonds. It also proposes a system of short-term Treasury loans and reinsurance contracts for state catastrophe funds (BestWire, Nov. 9, 2007).

ProtectingAmerica.org, which formed in 2005 with support from the two largest homeowners' insurers, State Farm Mutual Insurance Co. and Allstate Corp., to support a national catastrophe fund concept, said it saw the news as "a step that may inspire state and federal policy makers to embrace the program that we have been advocating for the past three years."

"Clearly, the past differences of opinion and resistance to change within the insurance industry about how we can best prepare and protect American families from the devastation of natural catastrophes have been overcome by the stark reality that the current system is broken and that we need to act now, before the next catastrophe strikes," Executive Director Robert W. Porter said in a statement.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

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