Insurance…Perfect Storm?

It looks like the insurance industry is sending a message

On Saturday we learned that “St. Paul Travelers Cos. Inc., Louisiana’s largest commercial insurance provider, plans to cancel all its commercial property policies in the New Orleans area next year.”

On Sunday I wrote about a LA Times article “Insurers learn to pinpoint risks — and avoid them” which focused in large part on a company called RMS which uses computer technology to develop knowledge on disasters which is then sold to insurance companies “to help them decide whom to cover and how much to charge.”

On Monday RMS issued a press release announcing it has published a report specifically on New Orleans titled “Assessment of Future Flood Risk in New Orleans.” The press release was titled…”Stakeholders Urged to Consider Analysis of Future Risk Factors as Crucial for City Redevelopment.”

The report is here. (PDF)

Today the Times Picayune reports on RMS’s findings and reactions to the report…

The report on New Orleans’ vulnerability to flooding by the California company Risk Management Solutions shows that New Orleans continues to face increasing risk of flooding from land subsidence, increased hurricane activity and rising sea levels from global warming — but doesn’t take into account the Army Corps of Engineers’ improvements to the region’s flood protection system.

Insurance Commissioner Jim Donelon called the report another blow to Louisiana’s battered insurance market and stalled recovery.

“No doubt it will have a very detrimental effect on our ability to convince insurance companies to continue doing business in our state,” said Donelon, who questioned the validity of using a snapshot of pre-Katrina levees as the bedrock of the report.

“I think it calls into question the credibility of their report. If it’s not real world, if it’s not real time, what purpose is there for disseminating that information?” Donelon said. “I think the rating commission will take that failure of this model into consideration.”

SNIP

RMS said it can’t take levee improvements into account until they’re done, and said it would work with the corps and state and local recovery officials on updating its models with new information each year. “If things are changing fast, clearly we need to revisit this every year,” said Robert Muir-Wood, chief research officer at RMS.

SNIP

Muir-Wood [one author of the report] said that government should manage flood risk so that it can guarantee property owners a true risk of certain odds, such as a 1 in 100 chance of flooding, or 1 in 500 chance of flooding, for example, based on whatever the investment the community decides is worth making.“I think it ought to be a fundamental right,” he said.

But the report does throw Louisiana a bone for potential for flood mitigation efforts. The report says that if the corps builds levees that are 3 feet taller, it would improve the city’s flood outlook by an average of 125 percent, and if it raised levees by 6 feet, it would improve the city’s flood prospects by an average of 375 percent. (all emphasis mine)

The RMS report ends with this question…

Will New Orleans be the first city “lost to climate change,” or the first U.S. city to surmount the challenges of its location in an environment of rising coastal risk?

It’s a good question for the nation but right now I would reframe it…will NOLA be Lost to Lack of Insurance?

These developments are very disconcerting for the recovery. Insurance companies will read the report one way as they decide whether to continue writing policies after March when a “special emergency rule expires that had artificially held insurance coverage in place after Katrina and Rita.”.

Hopefully other stakeholders will read it another way, namely that it is time to act with urgency. To that end the levees ought to be scheduled for the new Congress’ 101st Hour.

UPDATE: A bit of clarification on my view. I am not unsympathetic to the message of the insurance industry. It is more reality based than that of the government which has promised much and delivered not so much in terms of protection to NOLA and has had it’s head in the sand regarding global warming. I used the title of perfect storm with a question mark because much seems to be developing on the insurance end and it could push these issues forward and intersect with government in a powerful way. I see this as a message to government of you may be be able to disregard reality (ignore global warming, drag your feet and skimp on protecting of NOLA — better levees and wetland restoration) but we the insurance industry can not. My question is if/ when/ how other stakeholders will weigh in and yes my preference would be I would advocate they do so in a way that makes NOLA protected and insurable.

7 thoughts on “Insurance…Perfect Storm?

  1. RMS said it can’t take levee improvements into account until they’re done,
    I’m skeptical… I’m waiting for something to the effect that if and when improvements are done, insurance will only be available to certain classes of housing or development—
    In other words, not to Mr. and Mrs. Joe Frame House but for new construction or construction within a development, or industrial construction, etc.
    call me cynical
    virgotex

  2. There’s a fairly simple solution to the “targeting” of policies and customers by insurance companies. If a company decides the risk to too great in one state to sell business, or homeowners or other liability and higher risk insurance, let them not offer said product. But also disallow them from selling their cash cow products like automotive, life and other low-risk, higher yield offerings in the same market.
    That’s what state insurance commissioners are for. And if they’ll play hard-ball with companies wanting to do business in the state, the citizens will recognize them with things such as governors election wins. I point to Kathleen Sebelius, former Insurance Commissioner of the State of Kansas as my prime example.

  3. Scout, I work in environmental cleanups and I advise banks on who is an environmental cleanup risk, before they loan money into the black maw of a potential chemical spill.
    My point is that the Insurance Companies drive EVERYTHING. The risk of climate change will drive the insurance companies away… anyway you slice it, either the demanded changes get made and everyone is on board, or they do not get made, and no major bank or insurer will come within 50 miles of NOLA.
    You can’t blame the insurers for being cowards in the face of this problem (though you can blame them for plenty else, like not seeing it coming). NOLA is the first US city I know of that was lost to climate change. It can’t be rebuilt the same way – I agree with that – but we might still be able to do something impressive.
    But on another level, how much am I supposed to care if someone builds a new house on an eroding cliff. How much of that risk does the social contract (and insurace contract) demand that I share in so they can have that amazing view?
    I would not tar the administration and the insurers with the same brush. One failed, the other acted predictably.

  4. mdhatter…I really do understand what the insurance companies are saying. It’s certainly more reality based than the Bush administration. I don’t know that I blame them.
    I think I’d lay blame with the federal government that has not done enough to address the risk to NOLA. What I think is important and needs to be addressed is the response of the federal government. If they had done more, quicker, in regards to the levees would the insurance companies be responding differently? It seems according to them they may. They are raising important issues.
    Also while the Bush has his head in the sand about the science of global warming the insurance industry is moving forward on the issue. Bush and Congress should be addressing this.

  5. Something to keep in mind, which echoes your last point in the post, Scout, is that the Fed is barely, if at all, involved in Insurance operation and regulations – it’s all handled at a state level. With the exception of Flood Insurance.
    The entire country is mapped out in Flood zones, with risks based on elevation, proximity to rivers or bodies of water, annual rainfall, community sewer/water system capability and maintenance, etc. The Fed was the only organization that offers straight Flood insurance *because commercial insurers wouldn’t offer it*, though some of them are starting to add it to homeowners’ policies in some states. You can obtain Excess Flood Insurance, which pays claims over the Fed limit, but basic Flood almost always comes from the Fed, first.
    There are some pretty specific underwriting and claim requirements for actual Hurricane coverage, to answer virgotex’s question. After Katrina, I imagine they’ll be even tighter in the NOLA area. But yes, they do make demands such as hurricane straps, which hold your eaves down in high winds; concrete/brick vs. framed construction, roofing material, window glass strength and size, and many more, depending on the location. Whether NOLA residents will be able to meet the requirements for Hurricane coverage is another question. Also, most water damage claims tend to have a chicken/egg quality to them – did something that’s covered cause a situation that allowed water damage (e.g., a tree fell on the roof) or is the water itself the principal cause of loss (e.g., the roof was old and just leaked)?
    To pin down Scout’s statement about the message – Yes, Insurers can threaten to pull out of the area and there’s nothing the Fed can do it about it. However, it would behoove Congress to listen to and act upon the Insurers’ reccommendations for decreasing the risk in the area, so that citizens aren’t left without any coverage. Especially since the Fed would cover the first $250-350K of flood damages (generally speaking).
    Another thing to bear in mind, assuming there’s a consensus to rebuild NOLA and it actually happens, is that no mortgage lender will provide a mortgage without homeowner’s insurance on the property. If the Insurers decide to start pulling out of NOLA, the real estate market (including mortgage lenders and banks) will die off and NOLA will end up looking like a cross between The Postman and Water World. The one saving grace about Insurance is that it’s highly regulated, so there’s less chance of a fly-by-night or predatory outfit moving in.
    I didn’t have many clients with property in NOLA, so my experience with specific underwriting and claims in the area is fairly limited. If anyone can correct or add to my top-of-the-head thoughts, that’d be great! Or if anyone has other questions, I can try to answer them as best I can.
    Rip –

  6. Absolutely.
    I was meaning that, moving forward, the insurers ONLY want to make money, and won’t play if they can not make money. The Casino’s rebuilt first because they’re the only ones who didn’t need to answer to the risk assessor underwriting their construction loan. Casino’s have cash in hand.
    The Administration. Almost better to leave it there. Their near total inaction either says A) they have an agenda, or maybe B) all the good engineers and equipment in the Army Corps of Eng. are overseas these last few years.
    The compounding degrees of failure and episodes of CYA really hint at an agenda. heck of a job. Sadly, “Pariah” looks good on a Republican resum.

Comments are closed.