The best way to address the increasing financial challenges of future natural catastrophes is to strengthen the current private market system, according to the National Association of Mutual Insurance Companies (NAMIC). Incentives that encourage stronger homes and sound pricing by insurers will reduce the loss of life and costs of devastating storms, NAMIC said in written testimony. The comments were submitted by NAMIC President and CEO Chuck Chamness to the House Financial Services Subcommittee on Housing and Community Opportunity, which held a hearing today. 

“We view this hearing as part of an important national conversation among policymakers, residential and commercial property owners, academic researchers, and representatives of the insurance, banking, and construction industries since fall 2005 when three major hurricanes — Katrina, Rita and Wilma — struck the Gulf Coast, killing more than 1,400 people and costing more than $180 billion in insured losses and federal disaster relief,” the statement said. “The fact that no major hurricane made landfall in the United States in 2006, despite predictions of a highly turbulent hurricane season in the North Atlantic Ocean, should not diminish our resolve to identify and implement measures to reduce the risks associated with natural disasters and to more effectively manage the economic consequences of future disasters.”

Chamness stressed that, for the vast majority of natural disasters, government need not be involved. “We believe the private insurance, reinsurance, and capital markets can serve as the predominant source of risk management for natural disasters — unless it’s a mega disaster.” A catastrophe comparable to the 1906 San Francisco earthquake could potentially exceed private market capacity. “To prepare for a disaster of this magnitude, it is appropriate for policymakers to consider whether government programs should be created to supplement the supply of private-sector capacity.” 

Such government programs would need to be carefully designed to avoid undermining the private insurance market and “distorting public perceptions of the risk associated with living and doing business in disaster-prone areas,” according to the statement.  

“The question lawmakers ought to be asking is, 'What mix of policies will maximize the private sector’s ability to provide property insurance in disaster-prone areas while minimizing the risk associated with living and doing business in these areas?’”  

NAMIC recommends Congress consider the following measures to address certain problems associated with natural disaster risk management and insurance:  

-NAMIC supports federal legislation that would create financial incentives to encourage states to adopt and enforce strong, statewide building codes.  Strong building codes as well as responsible land-use planning have been shown to greatly reduce the level of property damage and human suffering caused by natural disasters.  With respect to existing properties, we support government initiatives to create mitigation grant programs to enable homeowners in high-risk areas to invest in risk-mitigation measures.

-We support the concept of amending the federal tax code to allow insurers to set aside a portion of premium income in tax-exempt policyholder disaster protection funds.  We also support the concept of allowing homeowners to create tax-free catastrophic savings accounts similar to health savings accounts that could be used to pay hurricane deductibles and costs associated with retrofitting properties.

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