In The News › A Push for Mandatory Premium Discounts For Making Hurricane-Resistant Homes and Buildings

May 4, 2007

Source: Insurance News

A Push for Mandatory Premium Discounts For Making Hurricane-Resistant Homes and Buildings

A Push for Mandatory Premium Discounts For Making Hurricane-Resistant Homes and Buildings

May 4, 2007

SOURCE: InsuranceNewsNet, Inc.

The solution to Louisiana insurance crisis according to state Governor Katherine Blanco and Insurance Commissioner Jim Donelon is the mandatory premium reductions given to policyholders who follow building codes, put in storm shutters and fasten the roofs and walls to make their homes and business establishments more resistant to hurricanes.

Gov. Blanco has been working overtime to solve the insurance problem in her state. She said the root of the problem is the industry’s overreaction to an historic event. “It’s crippling us,” she said.

“I am attempting to… lower their level of anxiety about insuring Louisiana and… influence the rates downward,” the Governor said. “If that doesn’t happen, we’re not going to have a serious recovery.”

Gov. Blanco said premium rate hikes – up to 500% in New Orleans – left many citizens in Louisiana no choice but to drop their insurance coverage. Homebuilders are facing insurance rate increases of up to 350% percent.

Donelon said the five-point legislation package that he and State Governor Kathleen Blanco are pushing at the legislative session is designed to bring back insurance providers to the disaster-prone state. The proposal aims to strike a balance between consumer interests and rate relief and the insurance industry’s needs.

“Our approach calls for a Consumer Bill of Rights, mandatory premium reductions for bringing existing property up to our new building codes, and a fund designed to attract new insurance companies to the state,” said Gov. Blanco.

Gov. Blanco said the insurance industry should be expected to cut premiums when policyholders invest in reinforcements against hurricanes. Donelon explained the proposed mandatory premium reduction would require the approval of the Louisiana Department of Insurance or the Louisiana Insurance Rating Commission to determine if the claims are actuarially valid.

In addition, the two are proposing $100 million in grants to carriers to provide coverage to more homeowners in hurricane-prone areas. Governor Blanco and Donelon believe increasing competition in Louisiana will ultimately bring down and stabilize the skyrocketing cost of premiums.

According to Howard Kunreuther, co-director of the Risk Management and Decision Processes Center, expressed his support for the proposed legislative package at the recently held Bureau of Governmental Research (BGR) Breakfast Briefings.

Kunreuther, an expert on better management of risks associated with technological and natural hazards, said that premium rates are computed based on the level or risk. Therefore, any form of mitigation should translate into lower cost of coverage.

Kunreuther said laws that make premium reductions mandatory could effectively motivate people to take precautionary actions to diminish damages. The bill that Donelon and Blanco are recommending will give homeowners a sense of getting something in exchange for the money and time they invest in disaster mitigation, he said.

Louisiana should establish seals of approval for people who build following the new building codes, Kunreuther recommended. Doing so will create a standard in consumer’s minds and he calls having well-enforced building codes as crucial.

And because the package does not involve subsidizing insurance coverage makes the proposal viable because subsidies drive insurers away Kunreuther said. He believes allowing the free market take its course would eventually lead the insurance market to determine the true price of risk.

Aside from the Blanco-Donelon proposal, state Senator James David Cain presented SB195, which provides for privatization of the Louisiana Citizens Property Insurance Corporation. Cain is seeking for the state to solicit insurance companies to take over policies currently issued by the state’s ill-fated quasi-public insurer of last resort, Citizens Property Corporation.

Hurricane Katrina demolished Citizens Property Corporation forcing it to sell $1.2 billion in bonds to pay its debts, leaving every insurance policyholder in the state to pay off the bonds.

In his bill, Cain said owners could buy coverage through Citizens Property Corporation at a higher cost than regular insurers charge if insurance companies refuse to cover some pieces of property.

Donelon disagrees with Cain’s bill saying it is bound to fail because no one wants that business. He said the ultimate solution for the state’s insurance woes would be creation of the federal reinsurance program for natural disasters.

Based on the national catastrophe (CAT) fund, the government would take over insurance claims from natural disasters beyond a certain level. This would limit the amount of resources insurance companies would spend on reinsurance.

The proposal, which is patterned after the Terrorism Risk Insurance Act, would remove the risks for insurance providers and encourage them to return or lure new companies to Louisiana, Donelon said.

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May 4, 2007

Source: Insurance News

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