Capitol Hill Briefing on Catastrophe Issues
November 14, 2000
Planning for a Mega-Catastrophe
Can property insurers survive a future mega-catastrophe? What role should the federal government play in catastrophe insurance?
About 150 people crowded into a room at the U.S. Capitol Nov. 14 to hear a panel of experts address these questions, and others, during an Academy briefing on natural-disaster insurance issues.
The panelists all agreed on one thing: Whether it comes in the form of a hard-hitting hurricane, major earthquake, or some other type of natural disaster, the United States is headed for a mega-catastrophe somewhere, sometime.
"The potential for a huge catastrophe is higher today than ever before—in large part because of the build-up of property value and population in catastrophe-prone regions of the U.S.," said Academy Vice President Steve Lehmann, who moderated the catastrophe briefing.
"In some of the issues we're talking about today, we're really trying to deal with the mega-catastrophe we haven't seen yet," said Fred Kist, another panelist. "It's better to do that ahead of time, rather than wait and try to clean up afterwards." Kist co-chairs an Academy group that is preparing a catastrophe management primer for a joint meeting of NAIC and Federal Reserve officials.
To give a sense of what insurers might face, Kist noted that Hurricane Andrew resulted in insured losses of $18 billion in 1992—much less than if the hurricane had hit a more populated area of Florida. Next time, he said, the stakes could be much higher. "A $50 billion to $70 billion event is not out of the realm of possibility," Kist said.
A key question now, Kist said, is whether reinsurance and securitization will be enough to maintain insurer solvency after a "mega-cat," or whether the federal government needs to play a role.
Warren Tyron, a senior aide to Rep. Spencer Bachus (R-Ala.) on House Banking Committee issues, said legislation called the Policyholder Disaster Protection Act (H.R. 2749) could help. The legislation, which would allow insurers to create tax-deferred reserves to pay for future catastrophic losses, was developed with the help of the USAA insurance company, he noted.
"Basically, we are not ready for a mega-catastrophe," said Tryon, citing one estimate that a $50 billion catastrophe could leave 36 percent of insurers insolvent. The goal of H.R. 2749, he said, is to provide $20 billion to $30 billion worth of long-term, prefunded coverage against mega-catastrophes. He said that Congress is more likely to pass such legislation as part of a major tax bill than on its own.
Rade Musulin, who chairs the Academy's Communications Review Committee and will chair the Florida Insurance Council in 2001-2002, compared H.R. 2749 with H.R. 21, the Homeowners' Insurance Availability Act.
Musulin said that, as he sees it, there's no doubt that some sort of federal legislation is necessary to help the nation's insurance system prepare for "the big one." While there is no legislative "silver bullet," he said, a useful approach might be to combine some of the features of H.R. 2749 and H.R. 21.
While no legislation will be perfect, Musulin said, action is needed soon. A mega-catastrophe, like a heart attack, is likely to strike without warning. "One minute everything's fine, everything's normal. The next minute, you're going to turn on CNN and see a bunch of rubble where a city used to be."
Many of those in the audience were actuaries visiting Washington to attend the annual CAS meeting. The audience also included Senate and House staffers, FEMA and NAIC officials, officials from coastal states, other policy-makers, and lobbyists. And the educational process continued even after the briefing ended: The next day, several congressional staffers contacted panelists to find out more about the mega-cat issue.
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