Office of Insurance Regulation INSURING COASTAL PROPERTIES Insurance Regulation and Catastrophe Exposure: Regulatory and Market Proposals for the Future Boone, NC July 20 and 21, 2008
Recent Proposals: U.S. Senate Proposals U.S. House Proposals Mahoney, Klein Bill Industry Proposals Most Recent (July 15) Travelers Proposal Public Policy Debate
U.S. Senate Proposals S.292 Commission on Catastrophe Disaster Risk, and Insurance Act of 2007 To establish a bipartisan commission on insurance reform Sponsors: Nelson of Florida (for himself, Ms. Landrieu, Mr. Lott, Mr. Vitter, and Mr. Cochran) introduced this bill which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs S.926 Policyholder Disaster Protection Act of 2007 To amend the Internal Revenue Code of 1986 to provide for the creation of disaster protection funds by property and casualty insurance companies for the payment of policyholders’ claims arising from future catastrophic events Sponsors: Mr. Nelson of Florida (for himself and Mr. Martinez) introduced this bill; which was read twice and referred to the Committee on Finance S.927 Catastrophe Savings Account Act of 2007 To amend the internal Revenue Code of 1986 to create Catastrophe Savings Accounts Sponsors: Mr. Nelson of Florida (for himself and Mr. Martinez) introduced this bill: which was read twice and referred to the Committee on Finance
More Senate Proposals S.928 Homeowners Protection Act of 2007 To establish a program to provide more protection at lower cost through a national backstop for State natural catastrophe insurance programs to help the United States better prepare for and protect its citizens against the ravages of natural catastrophes, to encourage and promote mitigation and prevention for, and recovery and rebuilding from such catastrophes, to better assist in the financial recovery from such catastrophes, and to develop a rigorous process of continuous improvement Sponsors: Mr. Nelson of Florida (for himself and Mr. Martinez) introduced this bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs S.929 Nonadmitted and Reinsurance Reform Act of 2007 To streamline the regulation of nonadmitted insurance and reinsurance, and for other purposes Sponsors: Mr. Martinez (for himself and Mr. Nelson of Florida) introduced this bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs S.930 Hurricane and Tornado Mitigation Investment Act of 2007 To amend the Internal Code of 1986 to provide a credit against tax for hurricane and tornado mitigation expenditures Sponsors: Mr. Martinez (for himself and Mr. Nelson of Florida) introduced this bill; which was read twice and referred to the Committee on Finance S.931 National Hurricane Research Initiative Act of 2007 To establish the National Hurricane Research Initiative to improve the hurricane preparedness, and for other purposes Sponsors: Mr. Martinez (for himself, Mr. Nelson of Florida, Mrs. Dole, and Ms. Landrieu introduced this bill; which was read twice and referred to the Committee on Commerce, Science, and Transportation.
House Proposals H.R.91 Homeowners Insurance Protection Act of 2007 To establish a program to provide reinsurance for State natural catastrophe insurance programs to help the United States better prepare for and protect its citizens against the ravages of natural catastrophes, to encourage and promote mitigation and prevention for, and recovery and rebuilding from such catastrophes, and to better assist in the financial recovery from such catastrophes Sponsors: Ms. Ginny Brown-Waite of Florida (for herself and Mr. Buchanan) introduced this bill; which was referred to the Committee on Financial Services H.R.164 Policyholder Disaster Protection Act of 2007 To amend the Internal Revenue Code of 1986 to provide for the creation of disaster protection funds by property and casualty insurance companies for the payment of policyholders’ claims arising from future catastrophic events Sponsors: Mr. Jindal introduced this bill; which was referred to the Committee on Ways and Means H.R.330 Homeowners’ Insurance Availability Act of 2007 To establish a Federal program to provide reinsurance to improve the availability of homeowners’ insurance Sponsors: Ms. Ginny Brown-Waite of Florida introduced this bill; which was referred to the Committee on Financial Services H.R.537 Commission on Catastrophic Disaster Risk and Insurance Act of 2007 To establish a bipartisan commission on insurance reform Sponsors: Mr. Meek of Florida introduced this bill; which was referred to the Committee on Financial Services H.R.913 Hurricane and Tornado Mitigation Investment Act of 2007 To amend the Internal Revenue Code of 1986 to provide a credit against tax for hurricane and tornado mitigation expenditures Sponsors: Mr. Bilirakis (for himself, Ms. Ginny Brown-Waite of Florida, Mr. Lincoln Diaz-Balart of Florida, and Mr. Mario Diaz-Balart of Florida) introduced this bill; which was referred to the Committee on Ways and Means H.R.920 Multiple Peril Insurance Act of 2007 To amend the National Flood Insurance Act of 1968 to provide for the national flood insurance program to make available multiperil coverage for damage resulting from windstorms or floods, and for other purposes Sponsors: Mr. Taylor (for himself, Ms. Waters, Mr. Jindal, Mr. Melancon, Mr. Jones of North Carolina, Mr. Jefferson, Mr. Bonner, Mrs. Maloney of New York, Mr. Cleaver Mr. Al Green of Texas, Mr. Clay, Mr. Markey, Mr. Lincoln Davis of Tennessee, and Mr. Alexander) introduced this bill; which was referred to the Committee on Financial Services
Section by Section Summary of H.R. 3355 The Homeowners’ Defense Act of 2007 (Mahoney, Klein) Sec. 101. – Establishment; Status; Principal Office. Main establishment provision Establishes the Consortium Consortium comprised of participating states and the Secretary of the Department of Homeland Security Clarifies that the Consortium is not a part of the Federal Government Sets the principal office in Washington, D.C. Sec. 102. – Functions. Outlines the functions of the Consortium, which include: Establishes an inventory and aggregate participating state catastrophe risk Issuing securities and other financial instruments Providing for the entering into of reinsurance contracts Maintaining state catastrophe risk information to be accessed by private participants Preparing a database to provide research to increase market standardization Perform any other functions necessary to aid in catastrophe risk transfer Submit a yearly report to Congress on the Consortium’s activities
Sec. 103. – Powers. Provides for the legal, regulatory, and contractual powers of the Consortium. Establishes legal status Provides for the use of a judicially-noticed seal Outlines regulatory authority Outlines contractual authority Allows for the authorization of obligations Provides for authority over employment and compensation Allows for the acquisition of property Allows for the acceptance of donated services or property Provides any other necessary powers Sec. 104. – Non-Profit Entity; Restriction on use of moneys; Conflicts of Interest; Audits. Clarifies non-profit status and outlines accountability standards. Clarifies non-profit status Restricts the enrichment of Consortium personnel Guards against conflicts of interest Provides for audits by public accountants Section by Section Summary of H.R. 3355, continued
Sec. 105. – Federal Assistance. Allows for additional federal assistance, if available. Maintains eligibility to receive discretionary grants, contracts, gifts, contributions, or technical assistance Sets requirements to receive such assistance Clarifies of the Consortium’s non-governmental status Sec. 106. – Management. Establishes the organizational hierarchy and compensation. Establishes of the Board of Directors Designates the Chairman Outlines board membership Establishes the compensation of non-government employees Establishes the compensation of government employees Provides for the reimbursement of travel expenses Sets quorum requirements Allows for the appointment of an Executive Director Section by Section Summary of H.R. 3355, continued
Sec. 107. – Staff; Experts and Consultants. Provides for the hiring of staff and technical consultants. Allows for the appointment, termination, and compensation of staff Provides for the contracting of expert consultants Sec. 108. – State Matching Funds. Outlines the cost of state participation in the Consortium. Establishes an aggregate (not individual) $10 million state matching requirement for participation in the Consortium Outlines the formula for individual risk-based state share Sec. 109. – Federal Liability. Clarifies that the Federal Government will bear no liabilities from the actions of the Consortium. Sec. 110. – Authorization of Appropriations. Establishes the cost to the Federal Government. Authorizes the Consortium for five years at $10 million per year Section by Section Summary of H.R. 3355, continued
Title 2: National Homeowners Insurance Stabilization Program SEC 202. – Liquidity Loans and Catastrophic Loans for State and Regional Reinsurance Programs. The Secretary may enter into a contract with a qualified reinsurance plan to carry out the purposes of this Act. Conditions for loan eligibility - To the extent that a qualified reinsurance plan cannot access capital at a lower cost in the private market, including, but not limited to, catastrophe bonds sold through the consortium created in Title I of this Act. The occurrence of a covered event has resulted in insured losses in the geographic area covered by the program in excess of 150 percent of the aggregate amount of direct written premium for homeowners insurance. The State or regional reinsurance program is a qualified reinsurance program. The Secretary shall make a liquidity loan or a catastrophic loan to a qualified reinsurance program for the amount requested by the program. Section by Section Summary of H.R. 3355, continued
Liquidity Loans - The Secretary shall extend liquidity loans to state or regional reinsurance programs after determining that the state or regional reinsurance program has a capital liquidity shortage, and that it cannot access capital markets at effective rates of interest lower than those offered by this program. The amount of the loan cannot exceed the ceiling coverage level for the reinsurance program. The liquidity loan shall have an interest rate set at 3 percentage points higher than marketable obligations of the Treasury having the same term to maturity as the loan and issued during the most recently completed month, or such higher rates as may be necessary to ensure the amounts of interest paid under the loans exceed the sum of the costs. The loan shall have a term to maturity between 5 and 10 years. Section by Section Summary of H.R. 3355, continued
Catastrophic Loans - The Secretary shall extend catastrophic loans directly to a state with a qualified reinsurance program, if the Secretary determines that the qualified reinsurance program has sustained losses as a result of a covered event that exceed the ceiling coverage level of the qualified reinsurance program. The catastrophic loan shall have an annual interest rate .20 percentage points higher than marketable obligations of the Treasury having a term to maturity of 10 years and issued during the most recently completed month, or such higher rates as may be necessary to ensure that the amounts of interest paid under such loans exceed the sum of the costs. The loan shall have a term to maturity not less than 10 years. The Secretary may extend the term to maturity of a liquidity loan or of a catastrophe loan upon a determination that certain circumstances or conditions, established by the Secretary, exist. Such conditions include the occurrence of multiple natural catastrophes, economic hardship or recession resulting in decreased revenues. . Section by Section Summary of H.R. 3355, continued
Eligibility of States Without Qualified Reinsurance Programs – The Secretary may make a catastrophic loan to a Fair Access to Insurance Requirements (FAIR) Plan, or a Windstorm plan, or to a State or regional reinsurance plan providing that a public official with the legal authority to cosign a loan, cosigns for the loan along with the officers of the plan. A catastrophe loan to a state without a qualified reinsurance plan shall have a higher rate of interest and shorter term to maturity than a catastrophe loan to a qualified reinsurance plan as determined by the Secretary The authority of the Secretary to offer a catastrophic loan to states without qualified reinsurance programs shall expire 5 years after the date of enactment Section by Section Summary of H.R. 3355, continued
Section 203. Reports. The Secretary is required to submit a report to the President and Congress annually that identifies and describes loans made under this title. Section 204. Funding. The Secretary is directed to collect from qualified reinsurance plans a reasonable fee in order to offset the expenses associated with the program. There is authorized to be appropriated to the Secretary of the Treasury for each of fiscal years 2008 through 2013 $5,000,000 for the administrative costs of carrying out this title. To the extent that amounts of negative credit subsidy are received by the Secretary in any fiscal year pursuant to loans made under this title, such amounts shall be available for costs of such loans and for costs of carrying out the program under this title for such loans. Section by Section Summary of H.R. 3355, continued
Industry Proposals • Travelers http://www.travelers.com/SPT03PortalMain.asp?startpage=/corporate/ThomsonJump.html?p=irol-news%26nyo=0 • Nationwide • http://vocuspr.vocus.com/vocuspr30/Newsroom/ViewAttachment.aspx?SiteName=NationwideNew&Entity=PRAsset&AttachmentType=F&EntityID=113196&AttachmentID=245f81ef-54c4-41fd-adda-0081f04e6703 • Hartford http://www.thehartford.com/higfiles/pdf/CHIPProposal.pdf • Others
Industry Proposals Most recent- Announced by Travelers July 15, 2008 The "Four Pillars" include: 1. A stable and consistent regulatory environment, with a uniform set of rules applied to named wind coverage for coastal zones from Texas to Maine. This portion of the homeowner policy would be regulated by an independent federal body, with the remainder of the policy still regulated by the states. 2. Transparency in calculating insurance premiums, with risk-based, actuarially sound rates using approved standards and wind risk models, and a rating calculation mechanism to be applied if models and actual experience become misaligned over time. 3. Federal reinsurance mechanism for extreme events (such as hurricanes causing losses several times greater than those arising out of Hurricane Katrina), with the reinsurance made available to insurers at cost so there would be no taxpayer subsidy, and the savings passed directly to customers. 4. Encouraging stronger homes through federal guidelines for appropriate building codes and land use planning, with incentives http://www.travelers.com/SPT03PortalMain.asp?startpage=/corporate/ThomsonJump.html?p=irol-news%26nyo=0
Industry Proposals • Also supporting the "Four Pillars" principles are Nationwide Insurance, one of the largest diversified insurance and financial services organizations in the world, the Independent Insurance Agents & Brokers of America (Big I), representing a national alliance of 300,000 business owners and their employees, and The Council of Insurance Agents and Brokers (The Council), the premier association for commercial insurance agents and brokers (members place 80 percent of all commercial property/casualty premiums in the United States). • Source: http://www.travelers.com/SPT03PortalMain.asp?startpage=/corporate/ThomsonJump.html?p=irol-news%26nyo=0
The Debate (Not in Congress-the REAL Debate on the Blogs) Subject: Nothing more than a taxpayer bailout Posted On: July 16, 2008, 12:30 pm CDT Posted By: Chuck Comment: Why should the taxpayer in the midwest and west pay for wind cover for the Southeast and East coast? A Federal reinsurance program? What a crock. This is code for taxpayer funded program. The reason FL and other states in the south are a mess with respects to wind cover is because they don't charge enough for it, period.The big carriers like these two (and others that don't need to be named) want all taxpayers to subsidize the coastal states whether you live in IL, IN or IA. This is BS. • http://www.insurancejournal.com/news/national/2008/07/16/91909.htm Posted By: Ken Comment: I wonder how much the coastal areas puts into the taxes for this country. Since about 50% of the population lives within a 100 miles from the coast and about 80% of the business commerce is conducted there. How about the inland areas send more tax dollars to Washington. Would that make sense? This is a national problem!
Posted by:IOWABOY As far as kens remark about the taxes generated in the coastal areas versus inland..I'm ok with paying more taxes if you are willing to grow your own food and raise your own beef/pork. Where do you think much of the exported product comes from that is shipped from the coast? This was a society of giving when you can and taking what you need..Alas no more. We have created a nation of takers.The whole issue is about doing what is right for an insured. There is an exposure that needs to be covered. How do we do that while keeping the insurance company from going belly up? As far as "big insurance" trying to make money.. sure they are, since when did any of them become non-profits? Any agents out there looking to lose money? I didn't think so. Posted On: July 16, 2008, 12:45 pm CDT Posted By: Ellen Comment: Chuck, is this the same concept where the taxpayers will be bailing out all the people that did not have flood insurance in the midwest?
Posted By: Andrew Comment: Floods, hurricanes, tornadoes....some devastating natural occurrence is happening all over our country. The location of these disasters is not the issue. The issue is that rates should be set based on the risk of these occurrences and level of coverage and not subsidized by other taxpayers.The flood insurance program is a mess. Rates should be raised to be commiserate with the risk and coverage. Same for coastal properties. Same for all insurance programs. The market should be allowed to function. Posted By: Peony Comment: I don't agree with your position. The reason flood insurance is subsidized by the feds in the first place is b/c the exposure is just too large for the private market. When flooding occurs, it is catastrophic in that it affects many, many properties at the same time. If the peril of flood was not subsidized & private carriers were forced to provide it, many of them that did enter the flood market (& scant few would) would be completely bankrupt after the first major flood. The private sector could not charge nearly enough to cover losses b/c if the rates were actuarially sound, very few would be able to afford it. I agree, the fed program needs some overhauling, but doing away with it is not the answer. The peril of wind will follow suit in due time. P.S. The word is commensurate, not commiserate.
Com-mis-er-ate: To feel or express sorrow or pity for; sympathize with [Lat. Commiserari, commiserat: com-, with +miserari, to pity <miser, wretched.] Commensurate: Of the same size, extent, or duration. 2. Corresponding in size or degree; having a common measure or standard.
Handy Web Sites: U.S. House Financial Services Committee webpage http://financialservices.house.gov/who.html “Thomas” where federal bills can be reviewed (named in honor of Thomas Jefferson) http://thomas.loc.gov A shameless plug for our own website: http://www.floir.com