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Under the Dome by Joel Wood A Hair's Breadth

We are this close—just one misstep away from Congress turning on us. Pray for good weather and good karma in 2008.

By  Joel Wood

At President Bush’s final State of the Union address, Congress was implored to act on scores of critical issues in a time-tested, grand, role-playing exercise in prime time. The truth, of course, is that not much ever gets done in a presidential election year. Getting not much done is often a good thing. Considering the bad congressional karma for the insurance industry post-Katrina, lots of my colleagues will make their bonus this year just because it could be an uneventful legislative year in Washington.

But let’s consider the worst-case scenario. If there is a major natural catastrophe, particularly a hurricane, this season, the insurance industry could take another major hit in public perception, regardless of whether the industry deserves it. And if so, the Congress could lash back. I think our political capital is strong enough to where it won’t become a lynch mob, but beating back significant consequences wouldn’t be a walk in the park, either.

One consequence could be action on the McCarran-Ferguson Act. The effort to repeal the industry’s antitrust exemption in the past year has involved a confluence of powerful senators with grievances against the industry. Sen. Patrick Leahy, chairman of the Senate Judiciary Committee, has been mad at the industry for years on the subject of medical malpractice. The committee’s ranking Republican, Sen. Arlen Specter, is angry that major property-casualty insurers spiked his proposed asbestos resolution fund a couple years back. Majority Leader Harry Reid (while very good to the industry on issues such as terrorism coverage) is a trial lawyer from Clark County, Nev., just named one of the American Tort Reform Association’s top “judicial hellholes of 2007.” Enough said.

The war whoops of 2007 were led by Sen. Trent Lott, whose Katrina woes flipped him from one of the industry’s most stalwart champions to its most dreaded enemy. At the end of the year, he retired to become a high-rolling lobbyist. The temperament of his replacement, Rep. Roger Wicker, is much more compatible with mild-mannered Mississippi Sen. Thad Cochran, even though Wicker used to work for Lott. Insurance lobbyists from all sides breathed a sigh of relief when Lott departed the Senate, though my own feelings were mixed, as I remembered all the good he’d done for the business community.

If the industry gets hosed due to performance in a major catastrophe, it wouldn’t take much effort for Leahy to get the Judiciary Committee to pass the McCarran repeal, and the 60 votes needed to pass the Senate floor could be achievable.

But the range of potential actions could go much further. Already, the House has passed a bill that would allow the federal flood program to include wind coverage. Council members agree that the wind/water issue has to be resolved and there must be better coordination between federal and private coverage, but CIAB has not gone so far as to endorse the major expansion of federal involvement the House bill would provide.

Sens. Hillary Clinton and Charles Schumer already support the effort. Also, the House has passed the “Klein/Mahoney” proposal for a “voluntary” national catastrophe program, wherein the feds would back up states that pool their cat funds together. A critical mass of the industry dislikes the idea under the belief that the focus should be on land use, development and building codes and that private reinsurance is available for cat coverage, albeit at rates that many coastal dwellers have difficulty swallowing. Like the wind/flood bill, it wouldn’t take much for Klein/Mahoney to get traction in the Senate, with potentially lots more add-ons that the industry wouldn’t like.

Repercussions could also be felt on the broader regulatory reform agenda. Most enlightened insurance executives support an optional federal insurance regulatory scheme designed after the successful dual banking system. But a crisis in the industry could result in a layer of federal oversight junked on top of the fragmented state-by-state regime—the worst of both worlds.

I’m paid to contemplate the ugliest scenarios, and I tend to think that, even if there were a major catastrophic event, lousy legislation wouldn’t come to pass. The most fascinating and difficult-to-envision scenario, though, is the hurricane that nails a major metropolis in Florida. As long as the wind doesn’t blow, Florida Gov. Charlie Crist is a hero, a borderline demagogue of Lott-like proportions, who is sticking it to the industry by socializing the marketplace. When Florida Citizens, already one of the largest property carriers in the world, goes belly up—who’s going to pick up the tab?

A spokesman for the Property Casualty Insurers Association of America claims Florida’s actions are “leading the property insurance market in Florida down a path of deterioration.” Allowing Citizens to expand, the spokesman said, has caused it “to become a giant, lumbering beast that will threaten to financially ruin every man, woman and child in the state of Florida.” That may be an overstatement, but the consequences of “the big one” in Florida are enormous, and it’s anybody’s guess as to the federal government’s response to bailing out the state government that has taken on such gigantic risk. In any event, it wouldn’t be a pretty sight.

Wood is the Council’s senior vp of Government Affairs. Joel.Wood@LeadersEdgeMagazine.com

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