Catastrophes Strain Insurance Companies

Freak winter ice storms, floods, tornadoes and wildfires across Oklahoma kept insurance adjusters and agents busy.
There were 63 major federal disaster declarations issued nationwide in 2007, according to the Federal Emergency Management Agency. The number of declarations for 2007 was up from 52 a year earlier and from 48 in 2005, FEMA said.
In Oklahoma, two major ice storms in one calendar year, along with other catastrophes could have an impact on insurance rates, said Kim Holland, state Insurance Commissioner. Insured claims since through the first half of the year are estimated at $185 million. Companies racked losses in the tens of millions of dollars over the past year-and-a-half.
“A rate increase might be indicated,” Holland said. Despite property losses from the many wildfires, floods, tornadoes and ice storms, Oklahoma’s insurance sector remains a competitive market. But rate hikes might not come from catastrophic losses as from the downturn in the equity markets.
The commissioner has made 10 emergency declarations since the start of the year, more than twice a year ago when Holland made four emergency declarations.
On the state level this year, Holland has made four disaster declarations and three additional fire management assistance declarations have been made.
Holland made seven emergency declarations in 2007 involving storms, flooding, tornadoes and ice storms.
Insurers cover losses through investments of policyholder dollars and those investments can impact underwriter products, Holland said.
“The combination of losses and the depressed market could cause a rate hike,” she said. “I would not be surprised to see rates go up.”
The insurance sector in the state makes a substantial impact on the economy. There are 49 property and casualty companies operating in the state and 28 life and health insurance providers, according to the Insurance Information Institute.
Nearly 30,000 Oklahomans earn a living in the insurance industry where there are 99,000 producers and adjusters in the entire U.S. It generates $11.8 billion in premiums and $194 million in tax revenues for the state, contributing to the General Fund and pension plans of firefighters, police and highway patrol officers. After the tax commission, the insurance industry is the largest contributor to the General Fund, which provides services, and support to communities across Oklahoma.
Insurance companies can raise their rates without submitting them to the Insurance Commission, Holland said. “We cannot disapprove their rates.”
But insurers know consumers are price sensitive, Holland added.
“Their profitability is based in retention. They are sensitive to competition. Policyholders have a low tolerance to price increases,” Holland said.
Last year Oklahoma ranked sixth in the nation for the number of fires, according to the III. The state lost 69,907 acres in 3,519 fires. California topped the U.S. with 9,093 fires destroying more than 1 million acres. Georgia, North Carolina, Florida and South Carolina rounded out the top five.
Destructive events such as those make an impact on catastrophe risk and insurance rates as they draw down insurance company’s reserves.
Hurricane Katrina jolted the insurance sector because for the first time, executives and regulators realized there was the possibility that a catastrophic loss of property could occur that would exceed reserves, Holland said. Reserves are assets kept in cash as a provision for meeting all demands.
That tightened the market in the Midwest as companies sought to reduce their exposure, she said.
In Oklahoma, the kind of exposure from something like a hurricane is not expected. At the same time, insurance companies anticipate and build up reserves for the “predictable” risk.
“We have a long history of tornadoes. We know that wind and hail damage causes the greatest losses,” she said. “Yes, the wildfires were extraordinary. They were unique.”
In every jurisdiction something will happen and companies can predict with some certainty the damage caused by tornadoes.
Despite that, the state market remains competitive, she said.
A concern for the Independent Insurance Agents of Oklahoma is a proposal for an optional federal charter to regulate insurance companies, said Dan Ramsey, CIC and IIAO president and CEO. The IIAO is the state’s largest insurance and property casualty agents association with 460 member agencies and 110 associate member companies in all 77 counties. The group represents more than 150 cities and towns across the state, employing about 10,000 people.
“Under such a proposal each company would have the option of being regulated either in Washington or at the state level,” he said. “This is extremely problematic for us and the ultimate loser is the consumer by having a regulatory authority that is totally without any accountability for their job performance.”
Holland agreed.
“The federal charter would not be in the best interest of the consumer,” she said. “In most instances we are closer to the consumer. We know the population. We know the market better than federal regulators.”
The state commission wants to promote a healthy and robust insurance market, she said.
“We want to make sure they have the opportunity to operate effectively, efficiently, are able to bring products to the market and make sure consumers are protected,” she said.
On the national level, regulators are debating how much companies can spread their risk — whether Oklahoma ratepayers should finance the insurance losses in places like Florida or California.
“The debate is how to address catastrophic losses,” Holland said. “The companies want to spread that risk. We in the central U.S. do not want to pay for their risk.”
So, the discussion has been what is the best way to provide for the mega- mega-catastrophe, she said.
There is constant tension about the extent of the federal government’s involvement in the insurance sector.
A recent proposal, by companies like The Travelers and Nationwide, is that the federal government comes up with a standard to handle wind damage. The change would put the feds in charge of paying for wind damage, similar to how flood damage is handled today.
Another area of concern is the increasing number of health insurance mandates on insurance companies, Ramsey said.
“Although our members are not primarily engaged in the health insurance business, they are also consumers and are concerned about the increasing costs of these .mandates,” he said. “Workers’ compensation and lawsuit reform are always near the top of our lists of items of concern.”
Since coming to office, Holland has worked for health care reform. Last fall, the Oklahoma Insurance Department solicited input from Oklahomans across the state in an effort to understand their health care priorities and needs. “Reform” means look at the system comprehensively, taking all things into consideration. There are many pieces that interlock and are interrelated.
“We have to address the fact that 20 percent of our population is uninsured,” Holland said. “We have to understand how they fit together to address the problem.”
Pointing out that the state’s population is in such poor health — the state ranks dead last in the nation in coverage — which it reflects on the access to health care.
“If we do not have a healthy population, business will not have a healthy work force,” Holland said.
It is a serous challenge.
“In terms of health insurance, it means we have higher workers’ comp costs and a higher liability,” she said. “I am in favor of getting everybody covered — not government-run health care. We have to provide basic coverage so people can lead productive lives.”
With so many Oklahomans uninsured, the industry must avoid increasing costs, she said.
“That would only add more to the ranks of the uninsured. Then they go to the emergency room for service, that drives costs higher, it means higher rates,” she said.
During the recently completed session of the Oklahoma Legislature, lawmakers debated a measure that would have required insurance companies issue coverage for autism.
Autism is a neurobiological disorder that advocacy groups claim is the fastest-growing developmental disability in the U.S. The Centers for Disease Control estimates that one in 150 children have autism.
Several consumer groups lobbied for the measure, referred to as “Nick’s Law,” that would require insurance coverage.
The children require extensive services from medical professionals and early intervention is critical to gain maximum benefit from existing therapies. Most private health insurance plans do not provide coverage for Applied Behavioral Analysis and other autism-related services.
Lawmakers, including Rep. Ron Peterson, R-Broken Arrow, opposed the legislation saying it would impose unfunded mandates on health insurance policies. The proposal, if allowed to become law, could have dramatically raised insurance premiums, the IIAO said.
Holland said the debate was less about autism than about ensuring everyone has coverage.
“We cannot afford for everybody to have everything they want just because it is available,” Holland said.
However, the legislature launched several interim studies focused on autism this summer. Three studies were sanctioned by the Speaker of the House, Chris Benge, R-Tulsa.
The state has three obligations, she said.
“For me, from a policy standpoint — we have an obligation that allows business to thrive and be productive. We have an obligation to educate our people and an obligation for good health care for our citizens,” she said.
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