Leader's Edge logo Under the Dome by Joel Wood Tell the Editor
Under the Dome by Joel Wood Captains Courageous

Natural disasters bring out our best and worst. We’re not as bad as our detractors paint us, nor are we as good as we like to think we are.

By  Joel Wood

As the World Trade Center still smoldered in 2001, Dean O’Hare, then Chubb’s CEO, announced that the attacks were an act of terrorism, not war, and would be fully covered. Rapidly, every insurer fell into line, more than $50 billion in claims were paid, and Congress enacted a federal terrorism reinsurance backstop that, twice extended, will continue until at least 2014. O’Hare’s action was a profile in courage.

Four years later, when Hurricane Katrina wrecked the Gulf Coast, a number of major insurers paid their claims and strived to do the right thing from the get-go. But I struggle to name a leader who publicly came forward as courageously as did O’Hare after 9/11. The result has been three years of reputational hits to the industry, grudging settlements in the billions with insureds, acrimonious legislative battles, and no particular big-picture resolution in sight—even with national fallout from the horrendous Midwest floods in June.

It pains me to report this view because so much of the hostility against the industry has been so over the top—as when then-Sen. Trent Lott said he would dedicate the rest of his legislative career to “bringing down State Farm and the industry,” what with the absurd proposals to strip the industry’s limited antitrust immunity under the McCarran-Ferguson Act as a punishment for Katrina, and in light of the (thus far) failed effort to add windstorm coverage under the National Flood Insurance Program under the theory that “actuarially sound” rates can ever be achieved in a federal bureaucracy.

Indeed, there is much that has been unfair to the industry in the Katrina aftermath. As the good folks at the Insurance Information Institute keep repeating, the overwhelming majority of Katrina claims have been settled without prolonged dispute. You only hear about a small percentage of contentious claims.

In June, I spoke on a panel before the Risk & Insurance Management Society’s legislative conference. One of the panelists intoned that Mississippi’s intervention to change terms of insurance contracts is ample justification for a federal chartering option for insurers that would be free of rate regulation and completely preempt state law.

I think there are better reasons for an optional federal charter. It’s hard for me to work up a sweat in defense of “concurrent causation” clauses, notwithstanding my disdain for the politicians and trial lawyers who conspired to retroactively change the terms of approved forms. Not to be sanctimonious, but there are some high-minded principles of insurance that I do defend—and the promise to pay is the paramount principle. How, then, do you square with the client the notion that, if the winds blow relentlessly for a full day in advance and then the water surges, there’s no coverage because it’s water and not wind? While it’s legally defensible, I understand how the industry got a black eye and why insureds were mad as hell.

From the beginning, we heard from our member firms that insurers were all over the map in their Katrina claims handling. Perhaps the worst anecdote involved two homes, side by side, both about the same value, both insured by the same carrier, both destroyed. One had flood insurance, the other didn’t. The insurer rapidly came to a deal with the home that had flood insurance, because it was a cheaper deal to settle, and played hardball with the other homeowner. Ultimately, both claims were paid, I’m told, with successful broker intervention. But you get the point. The promise to pay isn’t a promise to play arbitrage games. The General Accounting Office does a good job documenting the inherent conflicts when private, write-your-own companies adjust federal flood claims.

When Iowa was laid low by rising waters in June, Rep. Charlie Melancon, D-La.—a great guy, a Blue Dog Cajun, and a former broker himself—speculated that the political impasse on natural catastrophes might be broken because it’s no longer a coastal-versus-non-coastal problem. That’s unlikely, based on the sad fact that so few who were under water in the Midwest were even required to have flood insurance. Instead, the House and the Senate, at some point this summer, will likely reconcile their competing bills with incremental (and largely good) reforms, without resolving the bigger-picture, natural catastrophe issues.

It’s hurricane season. A big storm could change the political dynamics. And there is a proposal, albeit in its political infancy, that offers a break from the impasse—an idea from Travelers CEO Jay Fishman addressing the central fact that hurricanes don’t recognize state borders. The proposal calls for a uniform set of rules for insurers that would apply for the entire coastal zone from Texas to Maine, effectively spreading risk among as many people as possible who are subject to the same kind of risk, with respect to “named storm” wind damage. The Fishman idea will have its detractors, but it offers a new paradigm for the way that our nation addresses natural catastrophes.

In that sense, it’s a courageous idea—maybe just at the right time.

Wood is The Council’s senior vp of Government Affairs.
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