Industry debates HO disaster legislation

Rough Notes, Jun 2000 by Zinkewicz, Phil

Post-Andrew and Northridge market tightening belies industry's abundant surplus

The Homeowners Insurance Availability Act (HR 21) has been the subject of a kind of civil war in the property and casualty insurance business for more than a year now. The bill, which is currently before Congress, would establish a federal program to provide reinsurance for state disaster insurance of homeowners coverages across the country. Most primary insurers and producers favor the measure, but reinsurers apparently see HR 21 as a competitive threat.

Last year, in testimony before the House Banking and Financial Services Committee, U.S. Re Corp's Chairman and Chief Executive Officer Tal Piccione urged the congressional group to "assure that HR 21, or any similar type of proposed legislation, will not be formulated in such a way as to compete with private sector reinsurance capacity," of which he said there was a good deal. Some of that capacity, he said, is coming from capital markets. However, Donald Beery, a partner in the New Orleans

based Eustis Insurance Agency and the then president of the Independent Insurance Agents of Louisiana, told the congressional group that, although over the last four decades only two major hurricanes struck LouisianaBetsy in 1965 and Andrew in 1992-"the entire homeowners market has constricted because of insurance company fear of a possible major hurricane ripping through the state."

Supporting the federal reinsurance approach of HR 21, Beery said that most of the companies his agency represents have placed severe restrictions on the number of new policies that can be sold. "Many insurers will allow the agency to write only three or four new policies a year," he said, adding that other states face similar difficulties.

The debate over HR 21 is continuing this year as well. Testifying before the Senate Commerce Committee recently in behalf of the IIAA, Charlie Brown, vice president of Baker Welman Brown Insurance in Kennet,

Missouri, said: "Insurers and reinsurers are well equipped to handle the normal types of losses-fire theft and others that occur every day. But the financial losses that a major earthquake or hurricane can present to many regions of America are beyond the industry's capability to manage without assistance."

Moreover, Brown said that, despite the allegations of those who oppose a federal reinsurance program for catastrophes to the effect that there is ample reinsurance in the regular marketplace, many insurers are still reluctant to write homeowners business in certain regions of the country. "Even though Hurricane Andrew and the Northridge earthquake did not affect my area, attention has been focused on the potential for natural disasters there," he said. "We have seen our markets for earthquake coverage on homeowners policies dwindle at an alarming rate. We have seen companies cancel their policies, invoke moratoriums on new policies with earthquake, change earthquake to exclude all contents of a home, and increase premiums on either the earthquake coverage or the entire homeowners premium-a move that forces many home owners to reduce or cancel their insurance," he said.

Addressing federal program opponents' contentions that there is adequate reinsurance for insurance companies, Brown said: "With all this `sufficient reinsurance, there are still many insurance companies that will not write homeowners insurance in southeast Missouri. Other companies still have a moratorium on writing new homeowners business," he said. "And, we have many other companies that have continued to take the approach of avoiding writing homeowners insurance by making sure that their premiums are too high."

Now the IIAA is apparently going head-to-head with The Cincinnati Insurance Companies over the issue. The IIAA says that The Cincinnati has been writing to agents expressing its opposition to HR 21 (S 1361 in the Senate). In a letter to John J. Schiff, Jr., chief executive officer of The Cincinnati, the IIAA says: "Once again, The Cincinnati Insurance Companies has written to independent agents concerning IIAA's support for legislation that will assist agents in coastal, earthquake and other disaster-prone areas. While we certainly respect the right of The Cincinnati Companies to express an opinion, we cannot leave unanswered the many misrepresentations contained in your correspondence."

The IIAA letter continues: "First Cincinnati continues to misrepresent the trigger levels for reinsurance under HR 21. According to the bill, the trigger for federal reinsurance in any region of the United States shall be the greater of a 1-in-100 year event, a level between $2 billion and $5 billion of residential insured losses on an amount that exceeds the present market capacity of the private reinsurance markets. Using these standards, the trigger for federal reinsurance in Florida is likely to be $20 billion, not the $2 billion suggested by the Cincinnati. The same is true for virtually every other region of the Continental U.S., each of which is likely to have reinsurance trigger levels well in excess of $2 billion."