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WASHINGTON -- The test for legislation forwarded in the 105th Congress to provide federal financial assistance to the disaster insurance market should be "What's Best for the Consumer?", according to Consumers Union which is viewing the current crop of proposals with a strong dose of skepticism and suggesting guidelines for Congress to use in reaching that judgment.
In the wake of billions of dollars of losses from hurricanes and earthquakes in the early 1990s, the insurance industry has been pushing Congress to step in to provide financial assistance to the industry. At the same time they are seeking help from the taxpayer, however, the industry has made several quiet moves to successfully limit its liability -- without congressional assistance. They have achieved lower liability thresholds by dropping out of disaster-prone areas and transferring a new burden of liability onto the public coffers and consumers.
If Congress considers relieving insurance companies of some of the burden they currently carry, CU believes that Congress should assure that these costs are not merely shifted to consumers and consumers are not unreasonably burdened. An insured loss from a disaster should not also be an economic disaster for a family. Consumers should be able to find affordable coverage to protect their homes and families, not be unreasonably burdened by excessive out-of-pocket expenses following a disaster, and should have adequate coverage to restore them to their pre-disaster condition. At the same time, Congress should use disaster relief as a way to encourage insurance companies, government, and consumers to mitigate losses and avoid new building in disaster-prone areas.
When disaster strikes a community, be it the hurricanes that ravaged Florida and Hawaii in 1992 or the earthquake and aftershocks that inflicted devastation on parts of California in 1994, losses are paid for by the federal government, taxpayers, homeowners, and the insurance industry. These are personal tragedies for many families and businesses who lose everything to forces they have no control over. If the El Nino projections by weather experts are correct, nations across the globe need to brace for another wave of natural disasters in the months ahead that could have devastating consequences.
Funding the costs of disasters can begin even before disaster strikes. Payments for pre-disaster mitigation measures, such as full enforcement of adequate building codes, can actually reduce the costs of a disaster. According to some estimates, the costs from Hurricane Andrew would have been reduced by 40% had building codes been adequately enforced. A fair and proper combination of federal grants and loans, and private insurance should be available to pay for the costs of a natural disaster, and Consumers Union supports an integrated approach to funding the costs of disasters. A substantial portion of the costs of disasters are due to damages and losses to public infrastructures and buildings that are not covered by private insurance. Consumers Union believes, however, that the primary focus of any disaster insurance policy should be on mitigation of loss, before disaster strikes, and that industry should not retreat from its traditional role as the primary actor in paying for the cost of these catastrophes.
Regrettably, in many disaster-prone areas the insurance industry has adopted an anti-consumer posture which puts new limits on industry liability in future disasters while individuals and taxpayers are asked to assume increased risk and financial exposure. These unfortunate steps include:
The shifts in liability has occurred through the use of narrow policy terms, higher deductibles and the establishment of pools in Hawaii, Florida and California. Consumers who must cope with these industry shifts find they cannot get coverage or the coverage they find is prohibitively expensive or extremely limited.
Despite continued complaints from the industry about loses stemming for the string of disasters in the early 1990s, evidence indicates it has rebounded from the devastating losses of the first half of the nineties. This is due, in part, to fewer and less costly disasters in the past two to three years. According to the latest industry report, in 1997 there was a 50 percent drop in both the number of disasters and value of losses, down from $9 billion worldwide in 1996 to $4.5 billion worldwide. The financial results for the U.S. property/casualty industry reflect this improvement, with all financial indicators up and a rate of return of 11.2 percent for 1997 (third quarter results). According to industry analysts, 1997 will show the strongest rate of return in 10 years.
Although insurance purchased by insurance companies to help spread the risk, referred to as reinsurance, was limited and expensive immediately after the disasters of 1994, according to industry observers, there is an excess of reinsurance capacity for most insurers in most areas of the country. Other approaches, such as creating new reinsurance mechanisms and negotiable instruments for sale in the capital markets, have been wisely developed by the industry to create capital in the event of a large catastrophe.
Consumers Union supports efforts to ensure that the private insurance market provides insurance for natural disasters on a nationwide basis. Furthermore, any proposal Congress considers must be focused not on so-called industry "relief", but on strong mitigation measures to help reduce the costs of disasters coupled with wide consumers access to insurance coverage that is adequate.
Following are the "Principles" drafted by Consumers Union to meet these goals and serve as guidelines for policymakers who are grappling with these issues:
Congress should not enact any legislation that provides relief to the insurance industry unless the legislation meets the following principles to ensure that it also benefits consumers and taxpayers.
Adequate Insurance Protection at Affordable Rates
Strong Mitigation Measures to Reduce the Costs of Disasters
Retention of Risk in the Private Market
Minimization of the Effects of Cross-Subsidization to Help Ensure that those in High-Risk Areas are the Primary Payers
Appropriate State and Federal Oversight
Demonstrated Benefits to the Federal Government's Disaster Relief Expenditures
