There has been much discussion about the magnitude of potential hurricane losses and the need for a national disaster insurance facility to protect the insurance industry from major catastrophes (mega-cats). An interesting summary article appeared in the Wall Street Journal on June 7th (see here - $$$).
There are lots of good (and bad) arguments on all sides of this discussion, but most are missing the key elements. There have been and will continue to be large scale disasters that the insurance industry is entirely capable of absorbing, including significant levels of terrorism and hurricane losses, as has been demonstrated with the events of 9/11 and the most recent hurricanes. What needs to be the focus of the discussions is the level of exposure that is above the insurance industry’s capacity, such as the mega-cat hurricanes (see here) hitting the most exposed areas that the experts are concerned about. There has not been much distinction between these exceedingly rare events and other catastrophes that the insurance industry can absorb - but may not want to.
The political responses have been just that: political. Each proponent has an agenda that is not entirely consistent with the societal question including Mr. Hood, Mr. Garamendi and Mr. Liddy.
There are actions the insurance business can take to control exposure, and in almost all cases insurers are taking action. There are also steps that can be taken that are not. A few of these are:
- Do a better job of estimating exposures and controlling aggregation
- Require that flood exposed property have flood insurance as a condition of insurance
- Work with the rating agencies to enable, rather than penalize, specialized catastrophe insurers
A federal (or state) mandated system that is effectively a tax on property is not a solution to what is an insurance problem, and there is no such thing as realistic insurance rates when the insurance mechanism is the federal government.