Natural Catastrophe Insurance
Background
ARDA is a founding member of
The Natural Disaster Policyholder Coalition (NCPC). NCPC is an alliance
of groups joined together to address issues related to the availability
and affordability of natural catastrophe insurance. NCPC members include
a broad range of residential, multifamily and commercial property
owners, as well as business and financial services interests.
Since 2005, natural disasters
caused over $80 billion in privately insured losses. In addition,
explosive population growth in natural disaster prone areas, government
regulation, and litigation has dampened the insurance industry’s
appetite for insuring residential, commercial, and multifamily
properties from catastrophic events.
Still reeling from these
staggering losses suffered in years past and facing a possibility that
similar or higher losses may occur in the years ahead, many insurers and
reinsurers have either left the market altogether or reduced their
coverage exposure in many disaster prone areas. Using
Floridaas an
example, this vacuum has been filled by state-operated insurance
organizations that may be insufficiently capitalized to meet their
financial obligations to policy holders in the event of a large
hurricane or series of smaller hurricanes.
After the 2005 hurricane
season, homeowners and businesses have seen property insurance rates
spike from 100 percent to over 600 percent as recently as 2006 for many
coastal areas with heavy hurricane exposure. Moreover, these policies
are often laden with exorbitant deductibles resulting in significant
financial exposure to policyholders even with insurance. Those not able
to afford these burdensome rate increases have been forced to
self-insure and therefore expose themselves to huge potential losses.
However, self insurance is not an option for property owners that have
mortgages that require insurance coverage to be in place. All of this
has put a further strain on state-operated insurance pools that serve as
the insurer of last resort in these areas.
Perhaps not readily apparent is
the economic lag that the natural catastrophe insurance crisis is having
on related businesses in these areas. Residential and commercial real
estate sales transactions, development projects, and refinancings have
all been adversely impacted due to the lack of available or affordable
insurance coverage. This condition has had a disproportionate impact on
small property owners with a concentration of property(ies) in a single
market area. Some of these owners have been faced with the decision of
operating their properties at a loss due to dramatically escalated
insurance costs or selling their properties to buyers that are able to
place insurance on the property(ies) because of the greater geographic
dispersion of their property portfolios.
The high cost of insurance put
property owners at greater financial risk to recover from losses, while
also affecting property values since dramatic insurance increases often
cannot be passed on to tenants. Lenders are unable to provide new
financing to borrowers without sufficient insurance to protect the
underlying asset and are further exposed to potential future losses on
properties without insurance in their existing loan portfolio. Finally,
some businesses are foregoing expansions and are stretching to make
payroll due to the high cost of property insurance.
Solution
NCPC encourages the development
of a comprehensive natural catastrophe legislative solution to establish
the framework for a public/private sector partnership to protect
property owners, businesses, and taxpayers from losses resulting from
future natural catastrophes. Such a solution should recognize the
respective responsibilities of property owners, private insurance
markets, and all levels of government in preparing for and recovering
from catastrophic events.
| 
|
