Despite industry reluctance, the National Association of Insurance Legislators (NCOIL) will continue to explore a model law that would create public/private pools to fund catastrophe losses.
NCOIL representatives argued at their summer meeting in Philadelphia last week that the proposal would require “actuarially sound” formulas for determining rates, and would supplement private market solutions.
Insurance and reinsurance lobbyists, however, remain concerned that any public cat financing system would suppress prices artificially by relying only on historical losses to create “affordable” insurance.
“There are numerous proposals [on how to fund catastrophe losses],” said Linda Knauf, a director of the Property Casualty Insurance Association during a meeting of NCOIL’s Subcommittee on Natural Disaster Insurance Legislation. “This needs to be very carefully debated to make sure these programs don’t further encourage price suppression.”
Under the proposal by Rep. George Keiser (R-ND), the model system would create state pools in which local insurers would be enticed to participate through premium tax credits and other incentives.
Each pool’s targeted level would be 70 percent of the total insured amount that the state would need to cover the average exposure of the three largest natural catastrophes within the state over the preceding 15 years.
Rep. Keiser added that any financing proposal should be part of a broader effort by states to address rising natural catastrophe losses.
“I see this as a three-legged stool; passing catastrophe model legislation, strong mitigation practices and sound financing methods,” he said. “This is the final leg and a real issue, and it’s not going to go away: how do you pay?”
But industry representatives expressed concern that any system that involved a publicly financed catastrophe pool would not be able to charge adequate rates, especially since the current proposal only relies on actuarial assumptions based on historical losses.
“The target level should consider the potential risks threatening the state, not simply historical risks,” said Martin Simons of the American Academy of Actuaries. “[What] can happen in the future is more important than what has happened in the past.”
Keiser responded that predictive models have been shown to be unreliable and often inflate rates based on aggressive catastrophe assumptions.
“You have to find a level [of coverage] that people can afford,” Keiser said. “Sometimes the predictive models choose high. It’s not a very functional approach.”
Simons added that previous situations where actuarial assumptions were made to fit a price — rather than having price match actuarial assumptions — have resulted in significant losses
“When you use the best science and the price is too high, than the price is too high. The costs are high whether we recognize them or not,” Simons said.
Despite the objection of other industry participants over supplanting the private market and artificial pricing, Rep. Keiser said the committee will revisit the issue at its next meeting to gain additional testimony.
“Whatever we do needs to be built on sound actuarial principals. We do not want to go in and destroy a market,” he said.
Rating Model Update
NCOIL’s catastrophe committee was also updated on the work of the National Association of Insurance Commissioners (NAIC) on its project to create a publicly funded catastrophe model.
The cost of a basic model would be $15 million and would take two years to create, said Eric Nordman, director of research for the NAIC.
“Cost is a major issue,” Nordman said. “Some decisions need to be made along the way, such as will it be a commercial grade model with the appropriate level of detail. These decisions impact cost.”
He added that NAIC is currently reviewing the report prepared by Karen Clark & Company on its feasibility study of the cat model.
