October 20, 2010 / 4:02 AM / 9 years ago

US gov't urged to push wind, flood insurer reforms

* 5 years post-Katrina, solutions still lacking—Rand Corp

* Federal gov’t needs to step in amid lack of consensus

* Industry still feels effect of $63 bln in Katrina losses

By Ben Berkowitz

NEW YORK, Oct 20 (Reuters) - The federal government needs to drive reform efforts in wind and flood insurance, given that the public and private sector still have not come up with effective solutions five years after Hurricane Katrina, the Rand Corp. said in a research paper.

One solution, the policy thinktank said, could potentially lie in an idea that has split Congress and fueled tough debate within the industry: federal insurance or reinsurance for wind damage.

That option is one that has been vehemently opposed by the industry, which says it would cost thousands of jobs and deprive states of billions of dollars in tax revenues. Insurers like Allstate (ALL.N), Hartford Financial (HIG.N) and Travelers (TRV.N) have all weighed in with competing proposals.

Katrina, the biggest natural disaster in U.S. history, cost insurers some $63 billion in wind- and flood-related losses. The August 2005 storm devastated New Orleans and broad swaths of the U.S. Gulf Coast.

Given those losses and patchwork regulations associated with wind and flood coverage, governments and insurers were quick to agree that reforms were needed to more appropriately regulate policies and determine coverage levels and costs.

But five years on, that has not happened, leaving homeowners in vulnerable areas either uncovered or inadequately covered from always-looming storm risks, Rand said. In some cases those with coverage have seen their premiums rise as much as 400 percent, according to the report.

RAND did not take any definitive positions in the report, which it said was intended to inform the debate on the issue.

But it did present a number of the options regulators and insurers may need to consider, including the potential for the government to either directly offer wind insurance or to reinsure wind risks.


Among the proposals, government insurance or reinsurance would go the furthest in ensuring that homeowners are adequately covered for windstorms. It would in many ways mimic the government’s flood insurance program, the NFIP.

The downside, RAND said, is that government intervention could lead to subsidized rates that would not accurately reflect the true level of risk in the market.

“When premiums are kept below expected loss to make policies more affordable, they discourage investments in risk mitigation and encourage construction in high-risk regions,” the think tank warned.

There is also substantial uncertainty about the future of the flood insurance program, which could make adding wind to its remit difficult.

The U.S. House of Representatives voted in late September to extend the indebted NFIP for one year, granting a reprieve to the crucial program amid repeated failed efforts to reform it. [ID:nN23239403]

Reform failed last year amid in-fighting over adding wind to the flood program; the House was in favor but the Senate was against the idea.

Much of the industry also opposes the idea. The Property Casualty Insurers Association of America, which represents more than 1,000 insurance companies, has argued that federalizing wind insurance would cost nearly 42,000 private sector jobs. (Reporting by Ben Berkowitz; Editing by Gary Hill)

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