In The News › Insurers urged to reward mitigation

Apr 1, 2007

Source: Times-Picayune

Insurers urged to reward mitigation

Insurers urged to reward mitigation

Tuesday, May 01, 2007

By Rebecca Mowbray
Business writer

Insurance companies should reward homeowners who fortify their properties against storm
damage, a professor at the University of Pennsylvania’s Wharton School told the Bureau of
Government Research Monday.

“If rates are based on risk, there should be a break in the premium to reflect that mitigation,” said
Howard Kunreuther, co-director of the Risk Management and Decision Processes Center in
Philadelphia. “They don’t always do that, and that’s a challenge.”

Kunreuther is visiting New Orleans for the annual meeting of the Risk and Insurance Management
Society and spoke at a BGR briefing on property insurance reform at the Marriott New Orleans
Convention Center.

Insurance Commissioner Jim Donelon said he and Gov. Kathleen Blanco support the idea of
mandatory premium reductions for people who build to the building code, add storm shutters and
take steps to strap down their roofs and the walls of their homes. In the legislative session that
began Monday, three bills deal with those issues.

But Randy Varuso, of the St. Tammany Home Builders Association, said builders are having
trouble getting insurers to take note of stronger new construction. “The problem is that insurance
companies aren’t recognizing new construction to the new codes,” Varuso said.

Kunreuther said laws requiring mandatory premium reductions are an important incentive for
people to take steps to mitigate hazards. “I think that bill is critical for homeowners feeling like
they’re getting something for that improvement.”

Kunreuther, who is conducting a study about insuring and mitigating risks in large-scale natural
disasters, further recommended that Louisiana create seals of approval for those who build to the
new building codes to try to create a marketable standard in people’s minds. “It’s extraordinarily
important to have well-enforced building codes.”

Donelon predicted that lawmakers will try to roll back the building code in the legislative session.
He urged lawmakers not to do so and noted that Gov. Blanco has set aside $35 million to help
local governments pay for planning and enforcement costs.

“We must defend that improvement to our ability to attract new insurers to the market,” he said.

Donelon, who planned to meet Monday with a surplus lines insurer who was considering doing
business in Louisiana, touted his proposal to use $100 million to create incentives for insurers to
come to Louisiana to write business and take policies away from the state-sponsored Louisiana
Citizens Property Insurance Corp.

Citizens, the state’s third largest insurer, has 148,000 policies right now and its roster is expected
to reach nearly 200,000 by the end of the year — putting it in striking distance of Allstate Corp.,
Louisiana’s second largest residential insurer with about 210,000 policies. Donelon said he doesn’t
expect Citizens to grow beyond 200,000 policies because Louisiana’s three-year consumer
protection statute will help keep most coverage in the private sector.

By bringing new insurers to the state, Donelon said the incentive plan that he and Gov. Blanco
advocate will help make insurance more affordable. “That can’t help but stabilize, if not lower,
insurance premiums,” Donelon said.

Kunreuther said the proposal seemed sound because it didn’t involve subsidizing insurance
coverage, which ultimately drives insurers away. States should let the insurance market reflect the
true price of risk, he said, but should look for ways to assist those who can’t afford the premiums.

“Who is going to pay for the low-income people?” Kunreuther said. “That is where the tension is.”

While private insurance coverage stabilizes, Donelon said he now believes the federal government
will ultimately create a federal reinsurance program for natural disasters in which the government
would take over insurance claims from catastrophes beyond a certain level, limiting the amount of
money that insurance companies need to spend on reinsurance. Such a program would be
modeled after the Terrorism Risk Insurance Act, which handles insurance claims arising from
terrorism.

Donelon thinks a national catastrophe fund could become a reality after the 2008 presidential
elections.

And that, Donelon said, could be the ultimate solution for the state’s insurance woes, because it
will remove the risks for insurers to come to Louisiana. “That would be the silver bullet,” he said.

Apr 1, 2007

Source: Times-Picayune

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