A push for a nationwide catastrophic property loss reinsurance program, the
State insurer of last resort plans like California's FAIR Plan, Louisiana Citizens and Florida Citizens are actually concentrating risks rather than spreading them out, Birny Birnbaum, director of the Center for Economic Justice pointed out.
"It's really just not feasible for California to diversify all of its risk, because it has a concentration of particular perils," he said. "Around the country, it's the same thing. In the Midwest, it's severe convective storms. If we had a national reinsurance program, then that would really be the best bet, and that would be clearly the most efficient. It would allow the federal government, which has far more resources than the global reinsurance market, to diversify all of the catastrophe perils around the country."
The INSURE Act would have started this type of program.
So far, government and the insurance industry have mostly stressed catastrophe bonds as a means to better support California's FAIR Plan and respond to wildfire coverage needs. California's Assembly is
"There were cat bonds issued for wildfire in California, and very few of them are being triggered, which is pretty astounding," he said. "If a cat bond isn't going to be triggered by an event this big, then what good is it?"
Under California insurance commissioner Ricardo Lara's Sustainable Insurance Strategy, insurers are now allowed to pass the cost of reinsurance on to policyholders.
Reinsurance, the FAIR Plan and pooling risk all are cited as ways to address California's insurance availability crisis, brought on by major home insurers not renewing policies or not writing new coverage. Lara's strategy was presented as a way to address that issue, and a representative of the American Property Casualty Insurance Agency said in a January 29 webcast that Allstate and Farmers are returning or resuming coverage in California because of its provisions.
Ratings of insurers' financial health will become more important in California and in other states, because insurers going insolvent after a crisis like the wildfires could overwhelm whatever backup guarantee funds states have, according to Jason Rosenthal, an attorney at Much Shelist who specializes in insurance coverage issues.
"Even in the best of times, I'm not sure I'd want to rely on a state guarantee fund to backstop the insurance company if it can't pay the claim," he said. "In addition to that, in many states, whether you can make a claim against such a fund may depend on whether that insurance company is admitted in that state. If they're not, you may not have a claim against the guarantee fund if that insurer becomes insolvent."
Home policyholders also need all-perils policies rather than having to put together separate coverages for different climate and weather event damages, Birnbaum said.
"In Florida, you have to buy a homeowner's policy, a flood policy and a wind policy. So you're paying three sets of administrative costs, exorbitant and woefully inefficient, and it creates litigation issues about [which] policy is responsible for an event," he said.
