Edward Liddy, chairman and chief executive of U.S. personal lines insurer Allstate, says the U.S. sorely needs to devise a public/private solution for managing mega-catastrophes. But he is having trouble convincing his industry peers of this.
Allstate, and more recently rival insurer State Farm, strongly support proposals for a national disaster fund, where the U.S. treasury would reinsure state-sponsored pools such as the Florida Hurricane Catastrophe Fund on an excess-of-loss basis.
They believe the combination of soaring coastal property values and warmer waters in the Atlantic could soon cause a catastrophe too costly for the insurance industry to bear. Most of the $400bn of capital the industry now holds, explains Liddy, is earmarked for continuing business, not restoring damage from disasters.
Some fellow insurance chiefs, including the heads of U.S insurers Liberty Mutual and CNA, disagree. They contend that inviting the federal government to act as a reinsurer, in competition with the private market, would constitute a disaster in its own right.
This discord troubles Liddy. “I wonder at some of my fellow industry executives,” he says. “They are more than willing to embrace Tria, which protects people – not homeowners – from acts of terrorism. Yet they don’t like this proposal.”
He adds: “Allstate and State Farm probably have between 30% and 40% of the market share in just about every [U.S.] location. We are working hard to get other insurers to embrace this concept. Those insurers not joining us have very small market shares, and it will take time to build a broad-based coalition.”
Those opposing the national catastrophe fund argue that federal involvement would stifle competition in the private market, encourage people to continue living in risky areas, and lead to cross-subsidisation, where policyholders in landlocked states would help pay the insurance costs of people living on the coast.
“The biggest catastrophe we could have is getting the federal government involved,” said Ted Kelly, chairman, president and chief executive of Liberty Mutual, at a conference in December last year. “There is plenty of capital for catastrophes. The issue here is suppressed pricing. If we could double the price of homeowners’ insurance in Florida, we could handle it. When you put in a government backstop, you get all the moral hazards you expect. We are very opposed to it.”
Under Allstate’s preferred solution, property owners living in catastrophe-prone areas would pay premium upfront into state or regional pools. The amount they pay would be determined by actuaries. That money would then accrue tax-free in preparation for a big loss. The federal government would then reinsure those pools, at rates cheaper than the private market would charge, and cap the state funds’ losses if their capital was exhausted.
Several bills that address how insurers deal with natural disasters are under discussion in U.S. Congress. The favourite of these, says Liddy, is House of Representatives bill HR 4366, introduced in November by Senator Virginia Brown-Waite (R-Florida).
If enacted, this would establish a national catastrophe fund known as the Hurricane and Earthquake Loss Prevention Fund.