For the first time in two generations, Congress is undertaking a thorough review and reconsideration of how property/casualty insurance is structured, priced, and marketed in the United States.
Few can recall a time when there were as many bills in Congress as today touching directly on P/C issues.
Perhaps most notably, companion bills in the Senate and House of Representatives would repeal the McCarran-Ferguson Act of 1945, the statute that grants the insurance industry a limited exemption from antitrust law, the exemption that undergirds prevailing practices in the development of insurance loss costs.
More narrowly, but of greater urgency to people in coastal states, are a variety of bills that would increase the federal role in insuring losses arising from natural catastrophes. Among other things, these proposals would increase the amount and scope of coverage available under the federal flood insurance program and/or create federal reinsurance for state catastrophe funds.
Although no bill had been introduced when this magazine went to press, deliberations are well underway to modify and extend the federal terrorism reinsurance program, and possibly make it permanent.
While proposals to create a national insurance charter and regulator seem to be off the table or on the back burner for now, the idea continues to pop up in discussions of other issues. Also, the U.S. House has already passed a bill to streamline state regulation of reinsurers and surplus lines carriers.
In sum, the flurry of congressional activity constitutes a substantial review of the U.S.’s insurance mechanism, the web of formal agreements and informal understandings that determine how risk of loss is apportioned and insured or retained.
Critics of the industry argue that the problems of distressed markets are structural in nature, the results of fundamental flaws in insurance products and operations.
Given that there is very little public sympathy for an industry that reported record profits for 2006, P/C trade associations face a tough job convincing Congress to take an active role in helping to insure some risks without adopting a punitive approach toward the industry.
Hurricane Katrina has been a catalyzing event for critics of the insurance industry, including U.S. Rep. Gene Taylor (D-Miss.), who was one of the thousands of Gulf Coast residents to have his home washed away by floodwaters in the wake of the storm.
As hard as that was to live through, Taylor
apparently never wants his constituents to ever again face the task of determining whether their homes were damaged by wind or water.
Taylor has introduced a bill in Congress that would authorize the National Flood Insurance Program (NFIP) to sell a “multi-peril” policy that would cover losses from hurricane wind and flood under a single policy form, available separately for residences or commercial properties.
Both the residential and commercial policies would provide loss of use coverage, eliminating a coverage gap that exists under current federal flood policies. (Another House bill that would increase coverage limits under NFIP policies also proposes adding loss of use and business income coverage, where applicable.)
Coverage under Taylor’s would be sold at actuarially justified rates, according to the Mississippi congressman, and would not seek to subsidize high-risk areas.
By introducing the bill, Taylor is essentially saying that he believes the insurance mechanism that currently exists for insuring hurricane losses is not adequate, and that the government has to step in.
Theoretically, at least, Taylor is not seeking a subsidy for his constituents. Rather, he is seeking to give them the ability to buy the coverage they need at a fair price, without the burden of distinguishing between wind and water losses.
Yet, others are fearful that an expansion of federal flood insurance will lead to subsidies and displacement of private coverage.
“We have concerns that, by attaching a windstorm election to the NFIP, the proposal may create an undue amount of financial exposure to US taxpayers,” said Andrew Valdivia, an agency president speaking on behalf of the Independent Insurance Agents and Brokers of America (IIABA) at a U.S. House committee hearing in March on catastrophe insurance.
“There are better ways to resolve wind vs. water disputes,” said Mark Racicot, president of the American Insurance Association (AIA) at the same hearing. “For example, the existing program can be amended to require the NFIP to participate in state-sponsored mediation [of claims].”
Also, he continued, “[We can] re-examine the process through which NFIP coverage is sold and marketed to see if there can be better coordination between federal flood and private homeowners insurance.”
By creating a new insurance product available to consumers directly, Taylor’s bill contrasts with other proposals to stabilize troubled coastal markets, which generally promote one of three approaches, or some combination of them:
- Federal reinsurance for state-sponsored catastrophe funds;
- A national disaster fund that would reinsure losses form a range of catastrophes; and
- Individual state initiatives.
All of these create doubts among insurers and reinsurers.
“[Reinsurers] believe that natural disasters are insurable in the private market and that state catastrophe funds significantly displace the private market,” said Franklin Nutter, president of the Reinsurance Association of America, at the House hearing.
“Catastrophe funds can lead to generational inequities, unfair geographic subsidies, and increased--and unwise--building in catastrophe-prone regions,” said Racicot.
For those who have been keeping track, there have been three rounds of extensive countrywide filings addressing terrorism in the years since the Sept. 11th attacks.
The first round came in the months following the attacks and leading up to the impending Jan. 1 reinsurance renewals.
At the time, reinsurers had signaled that they would be excluding coverage for losses arising from terrorist attacks in renewal treaties. Advisory organizations and independent filers had to quickly develop terrorism exclusions for primary carriers and secure approval of them from regulators.
Round two came after Congress passed the Terrorism Risk Insurance Act (TRIA) of 2002, creating the federal terrorism reinsurance backstop and, among other things, establishing
the distinction between “certified” and “non-certified” acts of terrorism.
Round three came after TRIA was extended in 2005, with certain lines added and others deleted from coverage.
The program is scheduled to expire on Dec. 31, 2007, so get ready for round four.
Although no bill had been introduced as of press time, there is considerable momentum in Congress for creating a long-term, perhaps permanent, federal role in insuring for terrorism losses, although with modifications to the existing program--changes that would require new countrywide filings.
One proposed change that has drawn widespread support is the elimination of the distinction between “foreign” acts of terrorism, which are covered under the program, and domestic acts, which are not.
“Experience has shown that the distinction between foreign and domestic terrorism is artificial,” said Charles Clarke, vice chairman of The Travelers Companies, Inc., in a statement before a Senate hearing. “Events such as the London Underground bombing [of 2005] have reinforced the practical difficulty of making this distinction.
“It is meaningless from an economic perspective and impractical from an insurance perspective.”
“Such distinctions are likely to prove irresolvable in the aftermath of an attack,” said Tom Minkler, president of a New Hampshire agency speaking on behalf of the IIABA.
The second desired change is for complete or near-complete federal coverage for terrorism losses from acts that utilize nuclear, biological, chemical, or radiological means.
Given the incalculable scope of damage and casualties that could result from a successful unconventional attack, “NBCR risk is not insurable in the private markets,” said Edmund Kelly, president and CEO of Liberty Mutual Group, in remarks to a House committee.
“Only the federal government has the responsibility and the resources to respond,” Kelly said.
Speaking on behalf of the National Association of Mutual Insurance Services (NAMIC), Warren Heck, chairman and CEO of Great New York Mutual Ins. Co., New York City, proposed creation of a separate federal reinsurance program for NBCR losses.
Among other things, the NAMIC proposal recommends that an NBCR coverage endorsement be developed that would provide federal reinsurance for NBCR losses but be administered by private insurers on a follow-form basis.
“While the capital markets have limited appetite for terrorism risk, they have almost no appetite for NBCR coverage,” Heck said.
While chances are good that the federal program will be extended with modifications, there is widespread support for retaining its basic structure of sharing the risk of terrorism loss through company deductibles and co-payments.
In comments supporting a long-term federal terrorism reinsurance program, U.S. Sen. Christopher Dodd (D-Conn.) noted positively that the current program “requires that the private sector bear a significant financial responsibility and helps to impose market discipline in the claims and underwriting process.”
“With per-company deductibles, every company is responsible for its own underwriting decisions,” said Kelly of Liberty Mutual in his committee testimony.
“Both Allstate and State Farm want to keep their special status, exempt from the antitrust laws, yet both rejected my offer to come here today and explain to the committee why they deserve it.”
With regards to this statement from U.S. Sen. Patrick Leahy (D-Vt.), it may be that the nation’s two largest insurers were satisfied to allow insurance trade associations to make the case for retaining the industry’s limited antitrust exemption, created under the McCarran-Ferguson Act of 1945.
Yet, it is also apparent that large national carriers will be far less affected than their smaller competitors by a rollback of the exemption.
“[We are] concerned that outright repeal risks ending certain pro-competitive practices,” said Susan Voss, Iowa’s insurance commissioner, speaking on behalf of the National Association of Insurance Commissioners (NAIC) at a Senate Judiciary Committee hearing in March.
Among those pro-competitive practices, Voss said, were the operations of advisory organizations that “collect and disseminate statistical information, compile aggregated loss cost data, and provide other services that make it easier for small- and mid-sized insurers to compete.”
“McCarran has increased the number and competence of insurers
by making it easier for small and medium-sized insurers to compete,” said Julie Gackenbach, an independent consultant speaking on behalf of NAMIC at a 2006 hearing of the U.S. Antitrust Modernization Commission (AMC).
The growing realization that smaller insurers have much at stake prompted U.S. Sen. Trent Lott (R-Miss.), a virulent critic of State Farm, to propose leaving the exemption in place for small companies.
Lott is one of several Senate co-sponsors of a bill that, along with its House counterpart, would repeal the McCarran-Ferguson Act and either prohibit collaborative insurance activities or subject them to oversight by the Federal Trade Commission.
Lott, who lost his home to post-Katrina floodwaters, personifies to some people a punitive impulse toward the insurance industry in the wake of that disaster. That’s not the only factor driving the move to reconsider McCarran, however. The drive to modify or repeal the industry’s limited exemption has a second track, so to speak, one resulting from a federal determination to review all antitrust exemptions, and one embodied by a recent report from the AMC.
The AMC was established in 2002 and began its deliberations long before Hurricane Katrina, and issued its first major report in April 2007, after the McCarran repeal bills were introduced in Congress. The AMC report does not call outright for repeal of the McCarran exemption, but it clearly calls it into question. “Statutory immunity from the antitrust laws should be disfavored,” the report reads. “Immunities should rarely (if ever) be granted and then only on the basis of compelling evidence that either (1) competition cannot achieve important societal goals that trump consumer welfare, or (2) a market failure clearly requires government regulation in place of competition.”
In short, the AMC report promotes the benefits of competition, and concedes the occasional need for regulation, but does not express a role for permitting collaborative activity to promote competition.
Regarding the insurance industry’s specific exemption, the AMC states that, absent the exemption, “data sharing would be assessed by antitrust enforcers and the courts under a rule of reason analysis that would fully consider the potential pro-competitive benefits of such conduct . . . Insurance companies would bear no greater risk than companies in other industries engaged in data sharing and in other collaborative undertakings.”
The AMC report reflects a bias within the legal community to make all commercial activities subject to antitrust enforcement unless the actors demonstrate a compelling need to operate exempt from those laws.
Speaking at a 2006 Senate hearing on behalf of the American Bar Association, attorney Donald Klawiter said, “the law should be replaced by a series of safe harbors to make clear that certain types of conduct by insurers are pro-competitive and beneficial to the American economy.”
Specifically, he said, “insurers should be authorized to cooperate in the collection and dissemination of past loss experience data . . . but insurers should not be authorized to cooperate in the construction of advisory rates or the projection of loss experience . . .”
In sum, the insurance industry enters the McCarran debate without the benefit of its history of generally providing reliable coverage. Instead it finds itself confronted by a legalistic impulse to force the industry to justify why something that few see as broken needs to be fixed.
Federal Focus 
