The United States is unprepared to deal with the financial toll of increasing natural calamities and must pursue a national plan to deal with damages from looming "mega-disasters," insurance regulators asserted yesterday.
Regulators from every state but one voted to adopt a controversial white paper that warns of massive new losses, mostly from hurricanes but also from earthquakes, tornadoes and other perils. The move, nearly five years in the making, comes as regulators also consider if they should develop an expensive computer model to test insurers' assumptions about the increasingly dangerous behavior of hurricanes.
The white paper was launched after Hurricane Katrina shocked the country in 2005, killing hundreds and causing $42 billion in damages. It marked the pinnacle of a decades-long rise of cataclysms that ravaged the nation's increasingly developed coastlines.
"While Hurricane Katrina was devastating, catastrophe modelers have identified a number of possible natural disasters that would dwarf the damages caused by this event," the paper warns.
Regulators agree that damage is rising, but they are deeply divided about what to do in response. The white paper underwent 15 rewrites and caused clashes between coastal states and inland states, which worry that money from safer areas of the country will be absorbed by Florida and other major hurricane targets.
"My first responsibility is to South Dakota consumers, obviously, and what they have to pay for and what they subsidize," South Dakota Insurance Commissioner Merle Scheiber, the lone vote against the paper, said in an interview. "I don't feel they should be subsidizing coastal exposure."
The near-unanimous vote belies strong reservations among other regulators. Scheiber said the paper pushes an "ideology" that centers on expanded government involvement in catastrophe insurance. Critics say that can lead to politically suppressed insurance rates, higher risk to consumers and more development in coastal regions where damage is severe.
May accelerate push for federal backing for state programs
A handful of proposals exist. States or regions could open their own accounts to pay claims with new insurance fees. The federal government could reinsure state programs, or underwrite loans states use to pay for damage to homes and businesses. "There's not one answer to addressing natural catastrophe in our country," Illinois regulator Michael McRaith, who led the newest effort to adopt the paper, told his colleagues.
He added, however, that there's one thing everyone agrees on: "There is the potential for the United States to experience a mega-natural disaster."
The white paper could be used to advance a number of bills in Congress that aim to provide federal backing to state-run insurance programs. That idea is controversial because some of those programs are deemed to be financially failing. A federal program could spur states to create more of them.
Yet there's an argument that federal taxpayers are already pouring billions into disaster recovery, and that a new insurance backstop would generate revenue from premiums, providing order to chaotic periods of post-event trauma.
"It's not just an exposure to gulf states," Florida Insurance Commissioner Kevin McCarty said in an interview.
The white paper is only one sign of regulators' widening embrace of national catastrophe policy. They are also weighing the possibility of developing their own computer model to predict the probability of destruction by hurricanes and earthquakes in every zip code in the country.
Wanted: a computerized benchmark for risks
That requires enormous computer power, and also scientists, engineers and vast amounts of information, perhaps down to the window glazing on every house. It's like a mini-university department.
"It's a massive undertaking," said Tom Larsen, a senior vice president of EQECAT Inc., one of the top commercial modeling companies. He sees the regulators' model as a potential competitor.
Regulators say "no." The model, several said, would be used to measure the assumptions about hurricane damage from the models used by insurance companies. It would provide a benchmark as some insurers have begun to lean on models that project increased damage related to stronger and more frequent hurricanes.
State regulators have largely barred insurers from using those so-called "near-term" models, which look at a more recent period of years to determine hurricane behavior, to justify rate increases. Some industry representatives see the regulators' model as a threat to insurers' use of evolving science at a time of changing climate patterns.
"You need to be able to respond to unexpected situations," said David Kodama, who heads climate policy for the Property Casualty Insurers Association of America.
The National Association of Insurance Commissioners commissioned a study to determine the cost of developing a model. Officials declined to publicly discuss the findings, but acknowledged that it would cost millions to establish the model and millions more every year to maintain it.
Larsen, the private modeler, estimated that a basic model able to determine risks nationally would cost at least $30 million. More would be needed every year to update the data that are fed into it.
"It's very expensive," said McCarty of Florida, which recently created a state model. He said it would be "prudent" to develop a national model that uses the newest science to measure insurers' financial health -- and to ensure they are not overpricing or underpricing their policies.