Debate Gaining Strength Over Government's Insurance Role

Sep 2, 2008


Wall Street Journal

Gustav and storms that follow it this election year could energize a debate over whether the federal government should insure against extreme weather, and in effect subsidize coastal growth.

The topic is particularly sensitive because of hurricane-prone Florida's political importance. Sen. Barack Obama, the Democratic presidential nominee, supports the concept of the federal government becoming more involved in covering natural disasters, an idea championed by Florida's Republican governor, Charlie Crist. Sen. John McCain, the Republican presidential candidate, has opposed it.

If Louisiana and its neighbors absorb big blows without buckling, that could undercut efforts to involve Washington by suggesting that states and insurers are successfully managing risk.

The nation is "one major storm" from a crisis, Ramani Ayer, CEO of Hartford Financial Services, said in an interview in August, before Gustav. "There's a lot of interest on [Capitol] Hill to want to do something."

The federal government already insures against flooding, and Washington's flood-insurance program ran up a $17 billion tab after Katrina. The federal government also began insuring against serious terrorist attacks this decade.

Private insurers sell most coverage for wind damage. States regulate those firms and in some cases have limited their ability to raise prices. The two camps have clashed since eight costly hurricanes struck in a span of roughly 14 months in 2004-05.

Large national insurers reacted to those storms by dropping some coastal customers and refusing new ones. Homeowners flooded to state-created insurers from Texas to Massachusetts. If those public-private hybrids get hit with massive claims, it can lead to assessments on residents statewide, not just near the water.

Government insurance programs often run up deficits because they don't charge rates high enough to balance the risk the programs take on. Some in the insurance industry say this reflects elected officials' unwillingness to make voters pay what they should. Government officials fret about the impact on local economies if consumer rates rise sharply.

If the federal government were to assume more hurricane risk, it could spark voter ire in states that don't have storm-prone shorelines. Other natural disasters, such as tornadoes and wildfires, typically cause far less damage.

States are trying to stimulate the private market. Florida has made low-interest loans aimed at helping insurers -- often smaller, local companies -- build up capital and sell policies. Louisiana is doing something similar, but with outright grants.

But the safety net that has been stitched together since 2005 hasn't been tested yet, says Jeff Mango, an insurance analyst at A.M. Best & Co. The storm seasons of 2006 and 2007 were both relatively tame in the U.S.

Allstate Corp. and State Farm Insurance Cos. want states to set up funds to sell low-cost reinsurance, which is basically insurance for insurance companies. Insurers would pass savings on to consumers. The federal government would help absorb the cost of major disasters.

Two other firms, Travelers Cos. and Nationwide Mutual Insurance Co., and two insurance-agent trade groups have called for the federal government to sell reinsurance for extreme events. They also want Washington to take over regulating insurance for big windstorms from the states.

The fact that Florida is so exposed to hurricanes could sharpen the debate in Gustav's wake. In 2005, Hurricane Wilma caused $20 billion in damage in the state. What isn't clear is whether Florida voters would flock to a candidate who supports deeper federal involvement in insuring hurricanes, or shun one who opposes it. Mr. McCain won the Florida primary, and Rudolph Giuliani, who endorsed the concept, came in third.

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