U.S. Plan Urged for Coverage of Catastrophes

Supporters of a national catastrophe insurance plan have a sales pitch for taxpayers who don’t live in a hurricane zone or on an earthquake fault: It could happen to you.

State regulators, insurance executives and industry experts gathered in the Bay Area for a two-day conference were nearly unanimous Tuesday in their belief that a nationwide, federally backed insurance fund was needed to give homeowners and businesses the ability to rebuild after a catastrophic earthquake, a major terrorist attack or another Hurricane Katrina.

The problem, they acknowledge, is selling such a potentially expensive plan to Americans in regions that rarely experience overwhelming natural disasters or that are not considered prime terrorist targets. Thus the pointed reminders of the powerful hurricane that devastated Long Island, N.Y., and large parts of the Northeast in 1938, and the 19th century earthquake in New Madrid, Mo., that was powerful enough to reverse the flow of the Mississippi River.

Disaster experts told conference attendees that a repeat of the 1938 Northeastern hurricane could cause $100 billion in damage today, and a Midwestern earthquake could cost another $100 billion.

A mega-disaster on the scale of Hurricane Katrina “can happen everywhere,” said Howard Mills, New York state superintendent of insurance.

With the federal government already committed to spending at least $60 billion to cover uninsured losses on the Gulf Coast, it’s clear that a national pool is needed to spread the risks of city-crushing catastrophes, said California Insurance Commissioner John Garamendi.

To work, a national risk pool would require the participation of state and federal governments and private insurers and reinsurers, according to a framework being discussed by Garamendi and his conference co-hosts: Mills of New York, Florida Insurance Commissioner Kevin McCarty and Illinois Insurance Director Michael McRaith.

Insurance companies would be obligated to offer catastrophic coverage on all lines of property and casualty products, and premiums would be adjusted for the severity of local risks, the proposal said. Additionally, policyholders would be prohibited from building in dangerous areas or using unsafe construction materials, the framework said.

Putting such a program together would require converting skeptical members of Congress who don’t represent areas prone to Katrina-sized disasters. Americans living in parts of the Midwest and Rocky Mountain region might not be willing to subsidize coverage for beachfront condominiums and cities built on fault lines, said Robert J. Hunter, a former Texas insurance commissioner now with the Consumer Federation of America. “Rural people everywhere aren’t worried,” he said.

In addition, a national disaster insurance pool would dwarf the federal flood insurance program set up in 1968 and the national terrorism insurance program that was created in 2002 in response to the Sept. 11, 2001, attacks on the World Trade Center and the Pentagon, making it a tough sell in a Congress already grappling with record federal budget deficits.

Insurance companies that have been hit hard by eight large hurricanes in the last 15 months insist that they may not be able to rebuild sufficient reserves to pay more claims if more hurricanes or earthquakes strike anytime soon. And for now, many companies are refusing to take on new business in the stricken coastal regions.

“This isn’t just an insurance issue. It’s an economic vitality issue,” said Edward Liddy, chairman and chief executive of Oakbrook, Ill.-based Allstate Corp., which insures 17 million households. Last week, Allstate placed advertisements in national publications calling for a federal catastrophic insurance program.

Liddy pointed to existing state government-backed risk pools for earthquakes in California, hurricanes in Florida and hailstorms in Texas as models for a broader national solution.

But a single state like California can’t begin to cover what could be hundreds of billions of dollars in losses from a repeat of the 1906 San Francisco earthquake, Garamendi said. He noted that high premiums and steep deductibles have limited participation in the California Earthquake Authority to about 14% of eligible homeowners.

“This is a state on the edge of a catastrophe at any moment, yet our insurance system does not give us the necessary funds to rebuild,” Garamendi said.