RIMS letter to U.S. Treasury makes recommendations for natural cat insurance market

RIMS has submitted a letter to the United States’ Federal Insurance Office, presenting possible improvements to the way coverage related to natural catastrophes operates in the country.

RIMS was asked to make its submission as part of the FIO’s study on natural catastrophe insurance. The FIO is a part of the U.S. Department of the Treasury.

In its letter, RIMS points out that the natural catastrophe insurance market tends to be more volatile than others, making it difficult to manage risk.

“One possible way to stabilize natural catastrophe rates would be to rely less on modeling of a specific property to assess risk,” the letter notes.

“Modeling was originally intended to model a large portfolio of risk over a broader area. As the modeling zooms in to a specific building, school, etc. then the reliability of that modeling lessens, which can lead to a higher risk factor, and thus higher rates for that specific property.”

The organization also suggested that a pool that allows insurers to aggregate part of their premiums for future losses could be another way to address volatility.

“In a year with no, or relatively few, losses from natural catastrophes, a portion of premiums could be placed into the pool to cover future events,” the letter states. “This would lead to greater stability in premium rates from year to year as rates charged in low loss years could be rolled over to help hold down rates in higher loss years.”

The letter also argues for clearer policy language and having a “universal acceptance” of what natural catastrophe coverage actually provides. “Doing away with carve outs or exclusions for things such as ‘storm surge’ would give the consumer a higher sense of security that they are fully covered, regardless of whether flood damage is caused by wind or ‘rising flood’,” the letter says.

Insurers could, in turn, see a higher take-up rate from people who are currently not insured because of confusion around coverage, RIMS says.

RIMS also suggested incentivizing property owners to make improvements, without making it mandatory, such as the Florida Residential Construction Mitigation Program, which provides funding for property owners to improve their residences’ wind resistance.

The letter also points out limitations of state catastrophe funds. The Florida Hurricane Catastrophe Fund, the letter says, has seen questions arise over its financial solvency, as it encouraged “thinly financed companies to enter the market due to the guaranty of low cost state reinsurance.”

RIMS’ letter was delivered to Michael McRaith, director of the Federal Insurance Office (FIO). The full comment letter can be viewed at http://go.rims.org/IINLR04UPL.