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Coastal states hope to ease a simmering insurance crunch by spreading the risk and taking on some of the burden themselves. Their plan is to join forces, pool their resources and create an emergency fund to backstop private insurers. The fund would be used anytime that damage from a major storm or other natural disaster exceeds a predetermined threshold. Simply put, there's safety in numbers. Risk modelers estimate that a storm strike on a major metro area such as Miami or New York City could cost insurers upwards of $150 billion, or three times what hurricanes Katrina, Rita and Wilma cost them. No one state can bear that heavy a toll by itself.
The new fund would encourage insurers to write more policies and set prices lower than if they had to assume a potentially catastrophic risk. Insurers would also be able to keep rates down because the states-backed pool would offer cheaper reinsurance than what private insurance companies such as Allstate or Nationwide can buy in the marketplace. In return, insurers would be expected to pass their savings along to property owners in high-risk storm areas from Maine to Texas, many of whom have seen rates more than double in recent years.
The idea has already proved successful in Florida, which created its own state-backed reinsurance pool in 1993. It is now leading the effort to bring other states on board as a way of spreading around the risk. Florida also plans to expand its own fund this year so it can sell more reinsurance to private insurers. The upshot: State regulators estimate that property owners should see their average insurance bills slashed by nearly a quarter.
Unfortunately, the new interstate fund won't be ready for the 2007 hurricane season, which runs June through November. The process of getting state insurance regulators to thrash out what each state would put into the fund will take months. For example, Alabama policyholders don't want to chip in as much as, say, those in Florida, a far riskier place to live vis-à-vis storms.
The states are acting in part because Congress won't. Calls for a national pool are going nowhere because inland states aren't willing to bail out coastal areas. Congressional legislation for a national plan isn't going anywhere. Plus many lawmakers don't like the idea of Uncle Sam playing the role of insurer. They're already unhappy that Congress is considering extending the government's terror insurance program.
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