Insurance Quotes & Advice

We are starting to enter the peak of the hurricane season.  Fresh off Tropical Storm Fay that dropped over 20 inches of rain over Florida, there are now an additional two named systems making their way through the warm tropical waters of the Caribbean.  Gustav and Hanna are still gaining strength and there are at least two more areas of low pressure that bear watching.

Right now Gustav is currently approaching Jamaica and has tentatively been forecasted to reach up to a Category 3 hurricane.  If it continues on it’s predicted track it is expected to strike somewhere in the Gulf between Texas and the Florida Panhandle.

Hanna is still in it’s early stages but it’s current track has it striking the eastern seaboard somewhere between Florida and the Carolinas.  It is expected to keep a westerly track due to the high pressure currently over much of the nation.

A severe hurricane season could sorely tax the claims paying ability and capital reserves of  insurers struggling during the current economic downturn.  The last two hurricane seasons were relatively mild and premiums had been trending downward over the past year, but we could see a sharp U-turn if Gustav turns into a major Hurricane like some are predicting.

If there is another big insurance payout, it will be interesting to see how it will impact the debate over a National Catastrophe Fund.  A repeat of 2005 may have the government shying away from putting taxpayers on the hook for that kind of money.

The insurance industry on the other hand might be clamoring for their own government bailout like the rest of their brethren in the financial services sectors.

A study on the proposed federal catastrophe reinsurance legislation and the House version of the reauthorization of the National Flood Insurance Program(NFIP) claims that taxpayers could be potentially on the hook for hundreds of billions of dollars.

Losses covered by federal proposals to add windstorm coverage to the National Flood Insurance Program and to create a system of loans and reinsurance to state residual market mechanisms and catastrophe funds could reach $230 billion in five years. They could also add $332 billion in a decade, according to a report sponsored by the group Americans for Smart Natural Catastrophe Policy.

The insurance industry is in favor of nationalized catastrophe reinsurance as it would offer a backstop for insurers which would be cheaper than what they pay now.  However, they are opposed to adding wind coverage to the NFIP which would displace the private market.

Right now wind coverage has been approved in the House version of the NFIP but not in the Senate version.  This could be an interesting debate as private insurers are starting to cut back on wind coverage.

Policy holders in high risk states that have costly property insurance would benefit the most as it would lower their premiums by shifting some of the burden to lower risk states.  The study’s claim of hundreds of billions in taxpayer burden is a worst case scenario and is premised on a hurricane season like the one we had in 2005.

Last time I looked our government was still running a budget deficit and Americans should be wary when they hear that Congress is thinking about nationalizing anything, Fannie Mae and Freddie Mac being a case in point.  While worst case scenarios are unlikely, when they do happen, somebody will have to pay and it will probably be in the form of higher taxes.

On Friday, a Michigan Appeals Court overturned a lower court which ruled that the state insurance commission exceeded it’s authority when it banned the use of credit scoring by insurance companies in determining premiums for auto and property insurance.  This is a controversial topic across the country, the insurance industry feels that credit scoring is a viable determinate for risk in premium pricing while consumer groups feel that it’s use unfairly discriminates against low income and minority groups.

Insurers sued in 2005 to prevent then-insurance commissioner Linda Watters from implementing rules reducing base rates and barring discounts to policyholders with good credit ratings. Barry County Circuit Judge James Fisher declared the rules illegal and unenforceable.

In 2003, Congress mandated a Federal Trade Commission study on the use of credit scoring by the insurance industry.  The study which was completed just last year concluded that credit scoring was an effective predictor of a consumer’s future claim filing probability.

Consumer groups slammed the study, stating that the use of credit scoring is no less than race profiling by proxy.  It demanded that Congress reject the study as nothing more than “biased insurance industry propaganda”.

Congress convened hearings earlier this year over the subject but has been slow to act up to this point.  Since the federal government doesn’t regulate insurance anyway, it will probably be up to each individual state regulator to make the determination on whether to ban the use of credit scoring.