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.
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
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
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.