Financial Risk Management for Natural Catastrophes. 1997. Edited by Neil R. Britton and John Oliver. Proceedings of a Conference sponsored by Aon Group Australia Limited FUNDING MAJOR DISASTERS WITH TRADITIONAL INSURANCE James E. Rutrough ABSTRACT In several areas of the USA there is greater exposure to major disaster loss than individual insurance companies and the industry as a whole can absorb. Hurricane Andrew's $US16 billion insured loss in the Florida region woke the industry to the devastation such disasters can wreak, both on lives and property, and on the financial stability of insurers. With the growing shift of USA population to areas with greater exposure to natural catastrophes, and with apparently changing weather patterns, major writers of personal lines are being forced to curtail writings for fear of over-exposure which could lead to substantial financial impairment or even insolvency. Issues such as inadequate rates and reinsurance capacity, availability concerns, and the need to maintain healthy insurance markets to keep local economies strong, must be addressed. All of this should lead to a consensus about appropriate roles for the federal, state and local governments, the insurance industry and other groups in the private sector. However, such a consensus has been elusive. As the largest property/casualty insurer in the USA, the State Farm Insurance Companies have a major stake in developing solutions that will lead to greater access to affordable coverage for people living in catastrophe-prone areas. Potential solutions include changes in insurance coverages and deductibles, enhanced loss-mitigation efforts, state-created pools and programs, and a federal government-supported solution. There are no easy answers, but State Farm and the rest of the USA insurance industry, along with regulators, legislators and other groups, continue to work toward solutions that will both serve consumers and ensure stability within the insurance industry. INTRODUCTION In 1996, natural catastrophes worldwide caused $US60 billion in damages. $US9 billion of that devastation was covered by insurance. Around the globe, there were 600 large-loss events. That's six times the number of large disasters we saw in the 1960s. The insured losses were fifteen times greater. The story is roughly the same in the USA - more large catastrophes with much higher payouts. In fact, the 10 most costly disasters in USA history have happened since 1989 (Best, 1997). This paper discusses the traditional insurance system in the USA. It also discusses ways it might be redesigned in order to help address the 'Major Disaster' losses. In May, 1997, the editor of a leading USA insurance industry newsletter asked, 'Why does anyone underwrite property insurance?' (Sullivan, 1997). It is a question many USA insurers have asked themselves in the past few years. Sullivan explained his question this way: “Most lines have failed to earn an adequate return for most of this decade, and prospects for the future look little better. While the premiums per policy are often modest, the risk of loss can be huge due to catastrophic risk. In personal lines, it is closely regulated, and in commercial lines, it comes wrapped with long-tail exposures”. (Sullivan, 1997, p.1). So why do we sell property insurance? The same article provides some answers. First, the industry is doing what it can to manage individual company exposures in these areas. This is not easy to do because individual states are understandably reluctant to see carriers stop writing new policies or shut down operations altogether. Second, the industry is making some headway in getting adequate rates of return. Third, the industry hopes there will be some state or federal relief enacted before the next significantly damaging catastrophe affects North America. Fourth, the industry hopes that in the long term, it can turn a profit in these areas. All this takes some faith and a good deal of finger-crossing. A fifth reason can be added from State Farm's perspective: State Farm stays because their customers need them. They need the coverage we provide. State Farm has promised to be there when they have a loss, and the company intends to keep those promises. The company also stays because it has thousands of employees and agents who sell and service State Farm Insurance in catastrophe-prone areas. These people would otherwise be out of work. Finally, State Farm stays because the business it is in is insurance. It sells property insurance and pays losses. State Farm has done it well enough to become the largest property/casualty insurance company in the world in 1964, and it has remained the largest for more than thirty years. Regardless of the reasons, the industry keeps plugging away, hoping and expecting to find new solutions to the challenges brought about by increasing numbers of major disasters and increasing costs per event. HURRICANE AND EARTHQUAKE DAMAGE: THE TRADITIONAL INSURANCE SYSTEM It is fair to state that the USA insurance industry had seriously under-estimated the damage that could be wreaked by a major disaster in a densely populated area. Before the late 1980s, our system for measuring 'probable maximum loss' (or PML) was weak (Walker, 1997). The industry's reliance on PMLs has grown in the last decade due to the revolutionary advances in computer modelling, as well as information it now has from the damage caused by recent major disaster impacts. However, even those new estimates were flawed overall, the industry did not fully understand the impact of weak building codes and poor code enforcement. Moreover, it had little data about the damage 150 mile-per-hour winds would do to properties. Hurricane Andrew's arrival in 1992 and the 1994 Northridge earthquake have revealed some of that information. Today's models show that the USA has a probable maximum loss of $US86 billion for hurricanes and $US100 billion for earthquakes for damage from a 500-year event. Can the traditional insurance system absorb losses of this size? Hurricane Andrew's total cost was less than half of what the hurricane model shows is possible. But Andrew blew nearly a dozen Florida insurance companies out of business (Florida's Property Insurance Crisis, 1994). After five years, that marketptace is still trying to piece itself back together. The traditional insurance system is well-suited to shifting the risk of certain losses from property owners to a pool of similar risks for an equitable premium. However, it does not work for all losses. If the risk is so small that the individual can safely retain it, or so large that the pool cannot safely accommodate it, today's insurance system is either too expensive or it cannot handle the potential losses. The size of the risk that can be insured depends on reaching two objectives: • Having the capital - in advance - needed to pay the loss. • Earning a reasonable rate of return on that capital. Can the industry meet these two objectives in order to cover major disasters? The answer lies in how the industry meets consumer expectations as well as adheres to regulatory practices. Customer Expectations Customers of insurance expect full coverage. Over the years, the American property insurance policy has evolved into a multi-peril policy that covers every risk except those specifically excluded. Many consumers expect insurance to guarantee not just economic survival, but also a restoration of luxuries. Coverage has grown in response to consumer demand, product competition and government mandate. Insurers are not completely blameless. As we competed for market share, we added all the 'bells and whistles' to attract the customers we wanted. Consumers also expect low rates. Paying for insurance is like paying taxes: we all want to pay as little as possible for as much benefit as we can get. Regulators and legislators know that a good way to get re- elected is to show they are working to keep insurance rates low. At the same time, insurers have to charge an adequate rate in order to stay in business. If the industry is unable to get the rates it needs, it makes sense to avoid insuring homes that will blow down or shake down following a major disaster impact. With this kind of scenario it is very difficult to reach a free-market solution. Regulation The business of insurance is regulated by each of the 50 USA states. There is a good deal of diversity in how the states deal with disasters, and federal government involvement can make regulations even more confusing. There are also the issues of USA federal taxes and investor expectations. One industry tenet for being able to accept a risk is that the insurer be allowed to accumulate enough capital to cover losses. Unfortunately, private carriers will not be able to accumulate capital quickly enough to address a major disaster impact within the next decade, due to the combined effects of tax rules and investor expectations. Even if high levels of profit were possible, which they are not, this profit would not be sufficient. First, the Federal Government would take about 35% of the profit in taxes. Then, the remaining capital would be considered as after-tax profit and investors would be logically entitled to their distributions. Hence, the profits would be taxed and distributed, rather than going into a catastrophe reserve. General Impact of Major Disasters on Traditional Insurance Major disasters have impacted upon various groups within the USA's infrastructure. Primary insurers have felt tremendous pressure to reduce their exposure to appropriate amounts and to raise rates to more adequate levels. Those pressures have come from owners, investors, financial rating agencies, some regulators and reinsurers. Property owners in the areas with the greatest risk (Hawaii, portions of California, and south Florida) have felt the impact of a tight market and increasing rates. The impact varies with the approach taken by state governments. Since reinsurers are much more diversified than most primary insurers, they were not seriously impacted by Hurricanes Andrew and Iniki (Hawaii, 1992) and the Northridge earthquake. Reinsurers saw an increase in demand, and since they are largely free from rate regulation, they could react quickly with increases in both rates and primary insurer retentions. Approximately $US5 billion of new catastrophe reinsurance capacity was added through new reinsurers established in Bermuda (National Underwriter (Property/Casualty), 1966). Conventional wisdom has it that as of 1996, worldwide reinsurance capacity for a single event was estimated to be $US12 billion in excess of primary retentions of $US3 billion. Jurisdictional Approaches Three factors have impacted upon the states that are dealing with major disasters. First is the ambiguity of state and federal roles. The USA federal system of government allows states to avoid dealing with problems they consider 'country-wide' whereas the Federal Government can declare that a particular problem is 'one for the states.' Second, the free enterprise ethic, the hallmark of 'Americanism', is the strongly embedded notion that it is best to allow individual imagination and the profit motive to develop the capital and human resources necessary to solve any economic problem. And third, elected officials, investors and the media sometimes follow public perceptions of reality, rather than leading that perception toward the best solution. Our federal form of government, and our presumption that 'free enterprise' can do anything, have had a substantial impact on state and federal approaches to major disasters. Hawaii, Florida, and California have approached the challenge of major disasters differently. Hawaii The state of Hawaii understood relatively early that major disaster impacts were beyond the capacity of private insurers to handle. This may be because Hawaiians recognise they are at significant risk in terms of hurricane damage, making consensus about what to do easier to achieve. Hawaiians also realise that most other Americans perceive that Hawaii's problems are not typical of the entire country and are less likely to be solved by federal legislation. When Hurricane Iniki struck in 1992 and caused approximately $US185 million in damage, the Hawaiian legislature and Governor responded with relative efficiency. They created the Hawaii Hurricane Relief Fund to provide hurricane insurance coverage for property located in Hawaii. The sources of pre- and post- hurricane revenue for the Hurricane Fund include: • Annual assessment on insurers. • A recording fee on mortgages. • Premiums from Hurricane Fund insurance policies, which are used primarily to purchase reinsurance with remaining premiums going into reserves that can build tax-free. • Policyholder deductibles. • A maximum of $US500 million in post-hurricane assessments on insurers and about $US1 billion in reinsurance and lines of credit. If losses exceed this total amount, policyholders receive a pro rata share of their claims (Hawaii Revised Statute). The people of Hawaii recognised that the problem of hurricane exposure was one that Washington would not solve and that private enterprise could not solve. Hence, they addressed it themselves through their state government. Florida Florida's Insurance Commissioner Bill Nelson recently said, 'Paradise happens to be a finger of land stretching down into something we call 'Hurricane Alley'. Florida has been able to finance its infrastructure through growth and tourism; a tremendous number of people have moved into the state to enjoy the warm weather, the ocean and the tourist attractions (Skinner, Gillam and O'Dempsey, 1993). There are 1.8 million houses within 15 miles of the ocean in just three South Florida counties. The value of insured property along coastal South Florida is approaching $US400 billion (Gray, 1997). Obviously, the insurance industry does not have that kind of capital. Professor William Gray is the USA's leading hurricane forecaster. His past predictions have proven to be all too accurate. He predicts that between June and November 30, 1997, the USA will see eleven tropical storms in the Atlantic Ocean. Gray believes that six will become hurricanes and two of those will have intense winds of 111 miles per hour or higher (Gray, 1997). These numbers are all above historical averages. Unfortunately, however, Professor Gray cannot predict how many of these storms will come ashore in the USA and he is also unable to predict which, if any, could be another Hurricane Andrew. The Florida property insurance marketplace suffered major losses after Hurricane Andrew cut a wide swath across the southern third of the state: • Eleven insurers went bankrupt. • Most other companies shut down production. Some withdrew from the state. • Reinsurance, which was once plentiful and cheap, became scarce and expensive. • Rates increased an average of 20% per year (Associated Press, 1997). And the Joint Underwriting Association (JUA), which was opened to windstorm risks as a short-term market solution, has grown into the state's second largest insurer (Florida's Property Insurance Crisis, 1994). The insurance marketplace suffered a major meltdown, and it has been slow to recover. Several factors have contributed to Florida's long-term problems. Most of those factors come from the state's pre- Andrew history. On the day before Hurricane Andrew struck: • The insurance industry had under-estimated the enormity of the insured losses that could happen if a large hurricane hit the wrong place at the wrong time. Actual damage from Andrew was three times higher than originally projected. • Industry officials all believed private hurricane insurance could do an adequate job of spreading this risk. • Residents had been conditioned to regard low-cost hurricane insurance as a 'right'. Prices had been suppressed by severe competition. There had not been a major hurricane through the state in a couple of decades. • There is an immense concentration of both property exposure and political voting strength in the areas where the hurricane risk is believed to be the greatest. • The industry believed the strong building codes enacted in Florida were being enforced. That was not true. In fact, more than one-third of Andrew's damage has been attributed to construction that did not meet the building codes. The impact on State Farm Fire and Casualty Company, Florida's largest property insurance company, was more than had ever been expected. Andrew's losses exceeded, not just the profit, but the entire premium collected by the company during its 56 year history in Florida. If one considers all underwriting profits in Florida for the last 25 years and compares that figure with State Farm's Andrew pay-out, it would take us up to 1000 years of similar profitability in Florida to break even. The most shocking realisation we faced was that Hurricane Andrew consumed more than the net worth of the State Farm Fire and Casualty Company. Andrew erased more than the entire profits of the entire company for its entire history. And, Andrew was far from a worst-case scenario. A worst-case storm would cause a probable maximum loss of more than three times the company's net worth today. In 1970, Florida created the Florida Windstorm Joint Underwriting Association (JUA) to support economic development in areas where normal insurance marketing forces would not provide coverage. The areas eligible for the pool and the number of policyholders in it have expanded significantly since Andrew. Regulators, public policy makers and insurers have all under-estimated hurricane rate needs in the past, but today most recognise the need for much higher rates. Unfortunately, some groups think this need for higher rates comes from greedy and inept insurance companies. Those who are the most outraged by recent rate increases are naturally those who own property located near the coast. Since Andrew struck, the reactions of state government and the market have been varied and often conflicting. To stem the tide of insurers canceling policies along the coast or leaving Florida altogether, the state restricted cancellations and departures. This made insurers leery of exposing further capital. Virtually no high-risk properties were being written in the voluntary market, which was adding to the windstorm JUA growth. As the JUA grew, the fear of JUA assessments have made insurers more cautious about writing new business, which forced more property owners into the JUA. Last year, the JUA had become the state's second-largest property insurer (Florida's Property Insurance Crisis, 1994). Florida has decided against establishing a non-profit direct hurricane insurer similar to the Hawaii Hurricane Fund and the Federal Flood Insurance Program. They are also not interested in a California Earthquake Authority-type solution. Another challenge is rate adequacy. Investors must perceive both a reasonable opportunity for profit and a reasonable opportunity to remain solvent in order to stay in a market. Getting the needed rates to fund profit and solvency has been difficult. Finally, there are differences of opinion about product flexibility. Florida has mandated offers of coverage that have decreased insurers' ability to manage exposure through changes to coverage. Instead, insurers have managed their exposure by declining new customers and cancelling or non-renewing current policies. The Florida legislature has also reduced property owners' choices. For example, there are limits on the deductibles they can purchase. Florida Solutions As the number of policies in the JUA approached one million, it became a political imperative to reduce the policy count. A series of 'depopulation' efforts were designed to encourage insurers to voluntarily take the policies out of the JUA. Incentives included cash bonuses, funded from assessments on insurers since the JUA has no surplus. Another incentive is assessment exemptions. Policies taken from the JUA would not be counted for assessment by the JUA or the windpool. A few insurers are taking a great number of policies out of the Joint Underwriting Association, but this should not be mistaken for a rejuvenated market. Depending on where a company stood in line, its mix of 'take-out' business varied. Those first in line got almost exclusively 'ex-wind' and inland policies. As the mix of remaining policies deteriorates, depopulation is slowing. New policies coming into the JUA are for homes that have been non-renewed in the high-risk areas. The Florida legislature has chosen to enact the Florida Hurricane Catastrophe Fund, or CAT Fund. The most significant benefit is tax-free accumulation of dollars in years when there is not a hurricane. The CAT fund's ability to pay is based on its slowly accumulating surplus and its bonding authority. As the fund builds, insurers remain liable for their direct insurance policies and may be still at considerable risk of insolvency. For insurers who have been unable to achieve adequate rates, the premiums paid to the CAT Fund guarantee underwriting losses even in years when hurricanes do not hit. Pre-authorisation of post-disaster assessments on Florida property insurance premiums has been extensively used by the state of Florida. This nominally avoids putting the state in the insurance business, while at the same time authorises many types and levels of 'assessments' that are not greatly different from pre-authorised taxes. Combined pre-authorised assessments for the Florida Windstorm Association, the JUA and the Catastrophe Fund add up to a 'tax' rate of more than 60% on property insurance (Florida Statute). Problems facing the state's insureds have not been solved. If another 50 year storm strikes a major population centre, there would be: • Substantial numbers of unpaid claims. • A need to activate the pre-authorised assessments. • A need for additional taxes. • Significant insurer insolvencies. • And a complete dysfunction of the market, which would impair prospects of economic recovery. For the long term, the current strategy will not attract capital or provide for the tax-free accumulation of capital. This is necessary for accelerating the day when the industry can pay for a major hurricane. California When the Northridge earthquake struck southern California in January 1994, the extent of the damage was not fully understood at first. The 6.7 magnitude earthquake caused more than $US12.5 billion in insured property losses, nearly four times the $US3.4 billion in reported earthquake premiums that had been earned during the preceding 25 years in California (Insurance Information Institute, 1997). Less than three years later, California enacted a solution which offers a coherent strategy for addressing major disasters. California recognised that earthquakes are different from other disasters. As with pre-Andrew Florida, there was a serious under-estimation of damage that could be caused by a major disaster impact. However, California did have a 'knowledge advantage'. Californians better understand the enormity and terrifying nature of earthquakes although this does not imply that this knowledge is either widespread or acted on (Palm, 1995). Insurance policies traditionally excluded earth movement, and lenders traditionally accepted insurance that had no earthquake coverage at all. This changed to some extent when the legislature mandated that insurers offer earthquake coverage. Still, Californians recognised that the earthquake risk was different, at least to the extent of justifying a separate coverage and a separate premium. In contrast, most Florida insurers had covered the windstorm peril in property policies but included little or no hurricane load in their pre-Andrew rating calculations. As a result, Northridge consumed more than 25 years of earthquake premium for many insurers, while Andrew consumed 25 years worth of the entire property premium in Florida. Many insurers, including State Farm, had begun exposure management programs even before the Northridge earthquake. California also had an opportunity to learn from Florida's experience. Since Northridge occurred about 18 months after Andrew, Californians were able to look at what had been tried in Florida to see what was working and what was preferable not to emulate. When the earthquake struck in January 1994, Florida was in the midst of its third set of restrictions on insurance companies cancelling policies or leaving the state. Californians saw that punishing the insurance industry in Florida was not working, and the CAT fund was not solving the problem. Moreover, they realised that Florida was relying heavily on post-disaster assessments. In California, these were regarded as pre-authorised taxes. When the California market naturally constricted after the earthquake, the state's earthquake commissioner offered a traditional response. He activated a state-wide Fair Access to Insurance Requirements (FAIR) plan. This is a Joint Underwriting Association that ultimately assesses property insurers for their 'fair' share of the deficits if an earthquake occurs. However, as was witnessed in Florida, fear of market share-based assessments led insurers to further constrict their new writings, so that by the end of 1994, more than 93% of the insurers in California were writing no new business (The Personal Insurance Federation of California, 1996). More dramatically, two property insurers announced that they would non-renew 250,000 policies (Los Angeles Times, 1994; Chicago Tribune, 1994). Shortly after the Northridge earthquake, a new insurance commissioner was elected. Commissioner Quakenbush soon realised that a federal tax exemption was needed for rapid accumulation of capital. To get the tax exemption, the program took the form of a state agency, the California Earthquake Authority (CEA). The commissioner was authorised to solicit reinsurance and capital market contracts and determine whether 75% of the insurers would commit to participating in the CEA. With the authorisation of a new earthquake mini-policy, the legislature recognised that there was not enough capital to make all insureds 'whole' in the event of a major earthquake. Insurance could offer tremendous assistance to economic survival of families and communities, but citizens and communities must shoulder part of the hardship. The mini-policy features: • Deductibles of up to 15%. • Exclusion of coverage for out-buildings, pools, masonry fences and other features' • Limited contents coverage. • At least $US1500 in additional living expense coverage (California Insurance Code 10089, 1995). The CEA is a coherent strategy for rejuvenating the non-earthquake homeowners' insurance market. It shares the hardship if a major earthquake occurs in the short term, while accumulating capital for the long term. Funding for a major earthquake would be covered by several layers of capital including $US1 billion from the insurance industry, reinsurance agreements and, as a last resort, assessments on the public. The participating insurers have limited liability in the sense that they cannot be assessed more than these amounts. The CEA also will help develop a healthy, non-catastrophe insurance market in which the residual market will decline to traditionally low levels. When the effects of the mini-policy are factored in, the total $US10.5 billion surplus could pay for an earthquake causing 2.5 times the damage that occurred in the Northridge event, without causing insurer insolvencies. If an earthquake occurs that is bigger than the CEA can handle, claims would be paid on a delayed pro rata basis. This scenario has rejuvenated the California homeowners insurance market and has significantly reduced the probability of a loss exceeding the CEA's assets (California Insurance Code 10089.35, 1995). The Debate in Washington The USA government's interest in catastrophe insurance is at least as old as the 1968 National Flood Insurance Program (NFIP). The flood program shows what it takes for catastrophe insurance to be recognised first as a 'governmental' problem, and second as a problem to be dealt with by the Federal Government rather than the states. In the case of flood insurance there is a common understanding of the enormity of the problem: a USA tradition that flooding was not typically covered by insurance, and a catastrophe that occurs across many states. The conditions that supported Federal Flood Insurance do not exist with other catastrophes. Many insurers and the public do not recognise that the potential losses exceed the private capital that can be accumulated to pay them. There is also a reluctance to invite government involvement into the free enterprise system. A strong case can be made that the impact on the nation ought to be quite clear to federal policy makers. Over the last few years, the Federal Government has paid billions of dollars for damages to uninsured properties caused by natural catastrophes, including public structures. A portion of this aid could be eliminated through federal incentives for improved mitigation, such as upgraded and better-enforced building codes. Another portion could be reduced by establishing a hurricane/ earthquake program similar to the NFIP or by the Federal Government acting as a partner to reinsure insurers and states meeting federal criteria. Other logical federal approaches include guaranteed availability of federal loans and changes in the federal tax policies to support the rapid accumulation of capital. Unfortunately, there has been no consensus in Washington as to either the role of government in general or the role of the Federal Government in particular. Various approaches have been attempted and have enjoyed bipartisan support. These included a program that would provide direct insurance for earthquakes and hurricanes for homeowners, along with proposed high-level reinsurance for commercial losses and other voluntary writings. A second approach would create a private corporation to cover these risks. The Federal Government would guarantee a line of credit in case a disaster struck before the necessary tax-free surplus could be built. President Clinton's administration proposed that the line of credit would be replaced with reinsurance-type contracts that would be auctioned by the Treasury. Unfortunately, though each of these approaches had supporters, there was not sufficient priority or political will to achieve consensus on any of them. It is quite likely that concerns about federal deficits, along with a growing inclination to refer problems back to the states, will result in responsibility lying with the states. At State Farm we believe any new federal approach should maximise involvement of insurers, reinsurers, capital markets and the states, with coverage from the Treasury at some stop-loss threshold. This would be set at a level where there are no other resources available. The program should also include significant mitigation provisions. There is growing understanding about the necessity of a federal program and a realisation that it does not need to be a deficit buster. We are guardedly optimistic that some acceptable approach will be enacted. Efforts To Mitigate Major Disaster Impact Damage It is important for all parties to understand what mitigation can and cannot do, and when mitigation efforts will provide returns. It often takes incentives such as insurance discounts for homeowners and builders to invest in these measures. It also takes time before mitigation measures reap benefits. A new Insurance Service Office (ISO) scoring system is supporting building code enforcement. A private organisation is surveying various areas to determine the strength of the building codes, and the degree to which they are being enforced. The Florida legislature has required insurers to reflect the results of the ISO study in their rates. Insurers must pass along credits for better-than-average building code enforcement, and may impose surcharges in areas where enforcement is lax. Such a credit and debit system will motivate improved enforcement in the future. This program is in its infancy and will be monitored for the future. SPECULATION ABOUT THE FUTURE California and Hawaii have identified the problem and the pieces of a solution. Washington and Florida are not far behind. It is State Farm's belief that the appropriate pieces will be: • A recognition that traditional private insurance, at least in our tax and investment environments, cannot accumulate capital rapidly enough to provide a solution to the major disaster problem. • An opportunity to move uninsurable perils into a separate government pool. Advantages of such a pool include: Restoring the voluntary market for other perils; Allowing profits to grow tax free and accumulate faster; Depoliticising rates to some extent by accumulating all profits in the pool and defusing allegations of insurer greed and profiteering, and Giving legislators and regulators a greater stake in rate adequacy and in designing reasonable levels of coverage. • Maximising capital by sharing the risk with insureds. • Increasing mitigation activity. • Avoiding punitive measures that drive capital from the area. The future of the USA's property/casualty industry rests on when, where and how big the next hurricane or earthquake will be. The industry cannot foresee how the faults will shift or how the hurricane and political winds will blow, but it can prepare for the eventuality. REFERENCES Associated Press. 1997, Nelson Says Insurers Must Grant Consumer Credit to Get Rate Increases. New York. New York. January 30. Best, A.M. 1997. Greater Risks. Uncertain Rewards. Best's Review P/C. January: 56-62. California Insurance Code. 1995. California State Legislature, State Capital, Sacramento. California 95814: 10089. California Insurance Code. 1995 California State Legislature, State Capital, Sacramento. California 95814: 10089.35. Catastrophes: Insurance Issues. 1997. Insurance Issues Update. Insurance Information Institute. New York. February: 2,10,12,21. Chicago Tribune. 1994. Insurance Crisis has California Quaking. Chicago. Illinois. July 17. Davies, J. 1996. When the Earth Moves; A Detailed Study of California Earthquakes, Past and Present. The Personal Insurance Federation of California. Sacramento. California. Final Report of the Academic Task Force on Hurricane Catastrophe Insurance. 1995. The Collins Center for Public Policy. Florida State University. Tallahassee, Florida. September 30: Appendix 2(30). Florida's Property Insurance Crisis. 1994. Report of the Florida House of Representatives. Committee on Insurance. Florida Legislature. Tallahassee, Florida. November 7. Florida Statutes. 1997. Florida Legislature. Tallahassee, Florida 32399: 627.351(2,6), 215.555(5), 632.57. Gray, W.M. 1997. Forecast of Atlantic Seasonal Hurricane Activity for 1997. Http://tvphoon.atmos.colostate.edu/forecasts/1997/97hurr jun 97//. Department of Atmospheric Science. Colorado State University. Fort Collins, Colorado 80523. Hawaii Revised Statutes. 1997. Hawaii Legislature. Honolulu, Hawaii 96813: 431 P-1 et seq. Los Angeles Times. 1994. Republic to End Homeowners Policies in State. Los Angeles, California. August 30. National Underwriter (Property/Casualty). 1996. World Insurance Report. August 26: s19 (special section). Palm, R. 1995. Earthquake Insurance: A Longitudinal Study of California Homeowners. Malview Press. Boulder. Skinner, J.L., Gillam, M.E. and O'Dempsey, T.M. 1993. The New California? Demographic and Economic Growth in Queensland. In Britton, N.R. and Oliver, J (eds) Catastrophe Insurance for Tomorrow: Planning for Future Adversities. Alexander Howden Reinsurance Brokers (Australia) Limited. Griffith University. Brisbane: 249-274. Sullivan, B.P. 1997. Underwriting Property Insurance: Is It Really Worth the Risk? In Sullivan, B.P. (ed) Property Insurance Report. May 5: 1-9. Walker, G. 1997. Current Developments in Catastrophe Modelling. In Britton, N.R. and Oliver, J. (eds) Financial Risk Management for Natural Catastrophes. Aon Group Australia Limited. Griffith University. Brisbane: this volume.
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