Insurance Quotes & Advice

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.

On Friday, Allstate reached a settlement with Florida’s Office of Insurance Regulation(OIR) and will be forced to pay $5 million fine.  Allstate has been in a longstanding dispute with regulators over rate reductions and the subpoena of the company’s internal trade documents.

As part of the agreement, Allstate is required to lower its homeowners insurance rates throughout the state by 5.6 percent within 30 days of this agreement. The total rate cut amounts to 19.8 percent, including the 14.2 percent reduction that took effect June 1, 2007.

Allstate also must write 100,000 new homeowners insurance policies during the next 36 months and its Northbrook, Ill., corporate office must cancel a $175 million surplus note it issued to the Florida Allstate companies.

Back in January, the Florida’s insurance commissioner Kevin McCarty suspended Allstate from writing new policies in the state for failing to comply with a court order.  Then in April, a Florida Appeals Court ruled against Allstate when it alleged that the OIR had exceeded it’s authority.

This isn’t an isolated incident either, the insurance industry has been on the defensive ever since the public’s backlash stemming from the aftermath of Hurricane Katrina.  State regulators across the country have been exerting their power, which is why it comes as no surprise that the industry is in favor of the creation of the Optional Federal Charter.

Allstate couldn’t win this fight but at least it can finally get back to the business of insurance instead of court battles.