[StBernard] Insurers Retreat From Coasts

[Westley Annis]

Insurers Retreat From Coasts
Katrina Losses May Force More Costs on Taxpayers

By Spencer S. Hsu
Washington Post Staff Writer
Sunday, April 30, 2006; A01



Alarmed at the sharply rising cost of hurricanes and other disasters, home
insurers are pulling back from some U.S. coastal markets, warning of
gathering financial storm clouds over how the United States pays for the
damage of catastrophe.

The development is yet another legacy of Hurricane Katrina, whose mounting
toll of destruction along the Gulf Coast has crystallized a growing industry
debate about the combined effect of climate trends and population growth in
coastal areas. Some believe the two are creating a risk of losses so large
that insurers could be pushed to the breaking point, leaving the government
and taxpayers holding the tab for the next disaster.

Since Aug. 29 -- when the hurricane made landfall along the Gulf Coast --
Allstate Corp., the industry's second-largest company, has ceased writing
homeowners policies in Louisiana, Florida and coastal parts of Texas and New
York state. The firm has stopped underwriting earthquake coverage in
California and elsewhere. Other firms have pulled back from the Gulf Coast
to Cape Cod, notifying Florida of plans to cancel 500,000 policies.

Meanwhile, homeowners are moving to state-backed insurer plans of last
resort, which tend to be subsidized by taxpayers, and whose costs are also
rising.

As companies raise premiums, shed customers and battle homeowner claims in
hurricane-damaged states, an overhaul of the industry is being promoted by
an unusual coalition. It includes Allstate and State Farm Fire and Casualty
Co. as well as a bipartisan group of state regulators, academic experts and
former homeland security officials.

They propose establishing a greater role for the federal government in
backing up new state catastrophe funds or private insurance firms when
losses exceed a certain level, toughening state and local building codes and
increasing premiums to accurately price risks. Some also want to potentially
pool the high costs of covering perils such as earthquakes, hurricanes,
tornadoes and even floods into regional or national groups to ease consumer
cost, and to use some money to help improve first responders and local
preparedness.

"There is a potential market failure here, if not already an actual market
failure at work," said Robert E. Litan, a senior fellow at the Brookings
Institution who is working with state regulators in California, Florida,
Illinois and New York on a plan to reshape catastrophe insurance. "If we
have another hurricane season this year like we had last, I wouldn't be
surprised if you see a stampede of insurers trying to get out."

Taxpayers are already feeling the impact. While Katrina caused an estimated
$38 billion to $50 billion in private insured losses, it also helped put the
federal flood insurance program $23 billion in the red and prompted federal
relief spending of more than $100 billion. That is set to include about $10
billion for Mississippi and Louisiana homeowners.

"The fundamental dispute is over the role of government, and whether the
government should or should not play a significant role in effectively
helping to diversify the catastrophic risks that this country faces," said
Robert P. Hartwig, chief economist for the Insurance Information Institute,
the research arm of the industry.

Companies are shedding homeowners policies and driving residents to
taxpayer-funded state insurance plans. Florida's Citizens Property Insurance
Corp., for example, has 815,000 policyholders and is adding 40,000 a month,
said Kevin M. McCarty, state commissioner for the office of insurance
regulation. Last week, Poe Financial Group collapsed, and many of its
316,000 policyholders probably will move to Citizens, which already faces a
$1.7 billion deficit.

Louisiana Citizens Property Insurance Corp., the state's last-resort
insurer, expects to reach 200,000 policies this year; it had none in 2004.
Texas's insurer of last resort says it is down to $1.3 billion in reserves
and wants to raise rates by at least 22 percent.

"Everybody's thinking about this issue, every insurance company certainly,
and other businesses, bankers, lenders and government agencies," said Joseph
J. Annotti, spokesman for Property Casualty Insurers Association of America,
which represents 1,000 insurers, including some of the nation's largest
insurers of homeowners. "It's a political problem, and it's an economic
problem -- that's what makes it so difficult."

Analysts note that seven of the 12 costliest insured disasters in U.S.
history occurred in the past two years. At $57.7 billion, private insured
losses in 2005 were more than double those of 2004, according to the
Insurance Services Office.

Hurricane forecasters predict five major storms of Category 3 or higher in
the 2006 Atlantic season, with a chance of U.S. landfall at 81 percent,
compared with a 100-year average of 52 percent. In March, catastrophe
modeler Risk Management Solutions Inc. raised its estimate of insurance
losses this year by nearly 50 percent above pre-2004 baselines for the East
and Gulf coasts. RMS, whose estimates are used by insurers to calculate
premiums, blamed "higher sea surface temperatures."

Whether global warming is at work or not, damage costs will increase because
of rising property values and development. For instance, a direct hit on
Miami by Hurricane Andrew that would have cost $60 billion in 1992 would
cause $120 billion in damage today because the market value has doubled, the
Insurance Services Office estimates.

"In this environment, we think catastrophes that cost $100 billion in
insured losses are not hard to envision," ISO spokesman Christopher Guidette
said.

In reaction, the National Association of Insurance Commissioners set up a
task force this winter to study climate change, while the industry asked the
Wharton School of the University of Pennsylvania to analyze the benefits of
proposals, said Howard Kunreuther, head of the school's Risk Management and
Decisions Processes Center.

Insurers are divided over whether such warnings are more Jeremiah or Chicken
Little. As a whole, the industry is coming off some of its best years. It
recorded a 12 percent increase in net income after taxes of $43 billion in
2005, despite the storms, according to the Insurance Services Office and
Property Casualty Insurers.

What's more, up to half of the Katrina losses -- $38.1 billion -- were borne
by overseas firms or reinsurers (insurers for the insurance companies),
which say that growing capital markets are shouldering any growing burden.

"Our point is this industry has been very profitable and very resilient in
the face of the most significant catastrophic losses -- both terrorist and
natural disasters -- ever," said Frank Nutter, president of the Reinsurance
Association of America, whose members would be supplanted by federal or
state catastrophe funds or reinsurers. "We can't see why there's a case to
be made for a government role."

"Let the private sector do its job without extraordinarily complex new
government programs," said Eric Goldberg, spokesman for the American
Insurance Association, which represents more than 400 property and casualty
companies.

But Allstate has poured more than $1 million into a lobbying campaign it
calls ProtectingAmerica.org, enlisting State Farm and retaining former
Federal Emergency Management Agency director James Lee Witt and former
Homeland Security deputy secretary James M. Loy.

Allstate suffered its first quarterly loss in a decade because of Katrina,
$1.5 billion, and its reinsurance costs this year are expected to triple, to
$600 million. "Our obligation is to earn a return for our shareholders, not
to assume risks from people for a price that is not fair and adequate," said
Thomas J. Wilson II, president and chief operating officer.

Supporters argue that the insurance industry has a "breaking point" -- $50
billion or $60 billion, McCarty said -- above which the government must step
in to ensure solvency. What's more, they say, the cost of disasters is
already affecting consumers by pricing premiums too high and discouraging
participation in insurance programs against floods and earthquakes.

For example, 14 percent of Californians have earthquake insurance. About 20
percent of coastal Mississippians had federal flood insurance, Hartwig said.
For consumers, changes could offer one-stop coverage for a range of
disasters, avoiding gaps in coverage, pricey add-ons or disputes among
insurers over which is responsible for losses, said Florida state Sen.
Steven A. Geller (D), of the National Conference of Insurance Legislators.

For taxpayers, a coordinated system to accurately price and insure against
the risk of disasters would create true market incentives for homeowners,
developers and lenders to buy and build stronger and safer homes, cutting
the need for politicians to provide aid after a disaster.

After Katrina, for example, the United States is providing rebuilding grants
worth as much as $150,000.

"If I'm sitting on the San Andreas Fault and I have the choice of spending
$7,000 or $10,000 on earthquake insurance, and I'm watching what's going on
in Mississippi," Florida's McCarty said, "why wouldn't I wait for the
inevitable to occur and then point my finger to the Gulf Coast and say,
'What happened in Mississippi should happen in California'?"

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