GNY’s Heck Reflects Upon Sandy and the Industry’s Role at New York’s CPCU Conferment

GNY’s Heck Reflects Upon Sandy and the Industry’s Role at New York’s CPCU Conferment

Mr. Warren Heck, Chairman of the Greater New York Insurance Group, addressed the New York Chapter of CPCU at its Annual Conferment on November 15th, 2013. He reflected on the industry’s response following hurricane Sandy and on TRIA. Mr. Heck, who, as President and then Chairman, has headed the 99-year old Company for more than three decades, documented the outstanding performance of the property-casualty insurance industry following Sandy, particularly given the enormity of the storm and the extensive damage caused in its wake. While acknowledging the customary reservation about governmental involvement in the business of insurance, Mr. Heck noted that terrorism represents an “existential” and largely uninsurable threat to our nation. Without the backup provided by TRIA terrorism capacity would be limited, and, along with it, the availability and affordability of terrorism insurance. For the health of the economy and of the nation, Mr. Heck called on Congress to reauthorize TRIA for an indefinite term.

Here are his remarks as presented.

For most of my career, I have worked in one way or another in underwriting, and for me, underwriting has been the most exciting and satisfying job I have had at my Company. Nevertheless, I must confess that being a CEO in the insurance industry today is a much less hazardous job than being a chief underwriter. Over the years the nature of risk has changed, and of the many threats and challenges facing our industry today, I would like to speak about what I consider to be the two most pressing challenges. One is the emerging and growing exposure to catastrophic weather events, and specifically the ongoing issues with Superstorm Sandy, and the other is terrorism and the looming expiration of TRIA in December of next year.

The storm did give insurance carriers the opportunity to demonstrate what a valuable and essential service they provide. While there will always be some policyholder dissatisfaction with their claim recoveries, and there were ample coverage disputes with private carriers and the National Flood Program, but even critics of the industry pointed out that many complaints about insurance coverage were rooted in policyholder’s misunderstanding of their coverage because they simply don’t read their policies.

We all witnessed the massive destruction by Sandy across New York and New Jersey as well as in about 13 states, causing flooding and wind damage to homes and businesses; about 180 people were killed; hundreds and thousands of homes and businesses were damaged or destroyed; our subway and rail transportation were knocked out; more than 9 million people in the thirteen states lost power, in some cases for weeks; the industry sustained an estimated $20 billion of losses, and our economic loss was about $65 billion. Sandy was the second most destructive hurricane in US History after Katrina, as well as one of the worst catastrophic events ever to hit the New York Metropolitan area.

The New York Department of Financial Services created a Response Report which was implemented days after the storm struck the East Coast, and the data confirmed the excellent performance by the industry in paying claims. In the first 90 days following the storm, private insurance companies paid more than 76% of the many hundreds of thousands of claims reported, and last month on its first anniversary more than 95% of all claims had been closed. Based upon that report card, only about ½ of 1% of the Sandy-related claims had resulted in formal insurance department complaints. So it’s clear that insurers met their responsibility to consumers and the business community, and played a key role in the rebuilding process.

The promise to pay covered losses is essentially what an insured purchases when buying insurance. Therefore, the test of any carrier should be how quickly and fairly it pays its claims. We can be proud that our industry responded promptly and honorably to the more than 700,000 claims in New York, and 500,000 claims in New Jersey, reported in the aftermath of the storm. Our industry deployed more than 5,000 claim adjusters in New York State alone, and paid the claims on average within 20 days of the first report of damage. That timeframe was very good given the number of claims and the tremendous devastation that made it difficult for insurers to locate consumers, arrange appointments with public adjusters, and access disaster sites.

The superb performance by the industry makes it difficult to understand the actions by some regulators and state legislators. For example, in the aftermath of Sandy, in a number of states, regulators mandated that Hurricane wind deductibles and in some cases policy exclusions could not be applied. In another example, some regulators and legislators sought to undermine the sanctity of insurance contracts by pressuring insurers into not asserting anti-concurrent clauses that excluded damage caused by flood, even though some courts have addressed these clauses and have found them unambiguous and enforceable. Some regulators and legislators even sought to restrict underwriting tools that enable underwriters to fulfill their primary function, which is to assume, manage, and price risk. Shackling underwriters in that fashion exposes the insurance industry to more serious losses than contemplated from catastrophic events, and places the financial strength of the industry in jeopardy. It also inhibits underwriting business in high risk areas, which can create availability issues, including much higher pricing. After all, the insurance industry, as would any industry, requires the confidence in knowing that binding contractual provisions will be enforceable.

The one thing that was very clear from the results of the storm was how woefully unprepared our region is to withstand a storm the ferocity of Sandy. At the height of the storm, many homes on the coast were damaged or destroyed by high winds and a massive storm surge, which rose to a record height of 14 feet, causing a huge amount of the damage, while more than 75% of the flood losses had no insurance from either private carriers or the National flood program. Many homeowners didn’t even realize they had no flood coverage. These 14 foot storm surges are of great concern since the rising sea levels foretell even higher storm surges in the future.

“Some coastal areas might be too flood-prone to be safe for homes and people, or too risky to justify insuring them. To help reduce the exposure over the long term, voluntary programs for home buyouts” are being made available in New York and New Jersey.1 Both of these states have received federal funds from FEMA for the purchase of the homes in communities that sustained extensive flooding as part of the buyout program.

This is a good first step in the right direction; people who voluntarily reside in flood plains should be required to purchase insurance coverage including flood at risk-based un-subsidized pricing. Low income residents, on the other hand, should be eligible for state government subsidies in the form of insurance, supplemented by funds to mitigate their exposures, or for relocation to non-cat prone areas. Insurance companies should tie underwriting acceptability and provide premium credits for risks that are cat-exposed to encourage mitigation and to help the policyholders amortize their mitigation expenses.

“A recent study commissioned by FEMA shows that high-risk flood areas along the US Coasts could increase by 55% by the end of the century.”2 Better flood maps and risk based insurance premiums would go a long way in communicating the seriousness of the flood exposure in coastal communities. Unfortunately a lack of funding from Congress has meant that FEMA could not update, on a regular basis, the flood maps that are decades old. Fortunately, after the storm, there has been a drive to update and identify all of the flood zones, and insurance rates for flood coverage have been rising since Sandy as a result of the new flood maps and the new information about flood exposures. The rate increases reflect the fact that many coastal residents have been paying inadequate rates that in some cases were determined by outdated flood maps, and even more often by unrestrained political influence. The National Flood Program has been increasing its rates, but there has been push back by consumers and members of Congress to delay or roll back the reforms. There is little doubt that this would be a serious mistake.

With the high concentration of homes and people on the coast it will not be possible to remediate the flood exposure quickly. But coastal communities need assistance and financial help to prepare for the future threats from rising seas and worsening storm surge. Mayor Bloomberg commissioned a study from the Rand Corporation to protect the city in the future from severe storms. The study includes architectural changes to the waterways, such as jetties and buffer-zone wetlands, as well as improvements in the management of telecommunications.

Last June Mayor Bloomberg released a $20 billion plan with over 250 recommendations for preparing the city for future storms. However, the big question is how the city will pay for it. I believe that we all need to recognize these new realities, and to be part of the movement to do everything possible to address these issues. “While insurance can be a powerful tool to help manage risk from coastal flooding, our current system of taxpayer subsidized flood coverage under the National Flood Program is not helping us manage the problem effectively.”3

Finally, with respect to the National Flood program, it is disappointing that the Biggert-Waters Act, passed in 2012 with the objective of making the National Flood Program solvent after paying out more than it had been taking in after Hurricanes Katrina and Rita, is now getting a massive pushback from a group of bipartisan members of Congress. Congress wants to delay the implementation of actuarial rates which reflect the true cost of providing flood insurance coverage. Instead of delaying the implementation of this much needed legislation, there should be means testing for those who cannot afford the new flood rates. Returning to premium subsidies that encourage development in the flood plains is a great big mistake.

On another subject, I would like to briefly comment about the expiration of TRIA at the end of next year. I’m opposed in principle to federal government involvement in the business of insurance. However, in the case of terrorism, the public and business community needs protection, which I believe is the responsibility of the federal government, since terrorism is an existential threat to, and a hostile act against, the people and the government of the United States. Therefore, it’s imperative that Congress reauthorize an indefinite extension of the TRIA well before its expiration on December 31, 2014.

There appears to be bipartisan support in Congress for reauthorization of the backstop, as well as support from every area in the private sector and from the NAIC. The stumbling block seems to be a belief by a small contingent of influential members of Congress that insuring against terrorism is solely the responsibility of the private sector insurance industry. But contrary to the thinking of these Congressional representatives, the private sector is not able to handle the terrorism exposure alone. Unlike the case of flood insurance, for which there is ample worldwide reinsurance available, they just don’t seem to understand that without TRIA there will not be enough terrorism capacity, which will impact the availability and affordability of the coverage.

TRIA actually benefits the Federal government, the economy, and the country as a whole. The availability of terrorism insurance for the business community at affordable rates is first and foremost an economic issue, and we have all learned firsthand after 9/11 that TRIA, by making terrorism coverage available, played a major role in preventing an economic catastrophe.

The involvement by the insurance industry in TRIA also provides the government with an orderly process of claims handling and payments by the many thousands of claims examiners and adjusters in our industry. In the event of an attack, a continuation of the TRIA program will enable a speedier economic recovery for both the area attacked and for the economy as a whole.

It is encouraging that in recent weeks the House Financial Services and the Senate Banking Committees held hearings on a terrorism backstop extension. Of course, as expected, the industry and business leaders that testified at the hearings, persuasively made the case for a renewal of the program. It was also gratifying that none of the senators participating in the hearing called for letting the program lapse next year. In fact Sen. Jack Reed of RI said that the program is “absolutely essential.”

So, next year we will spend a lot of time and effort in hearings before Congress and in lobbying, which will likely result in a reauthorization in the final hours before TRIA expires. The greater concern is that Congress, in an effort to negotiate renewal, might adversely modify TRIA’s terms, which may have the same impact as a non-authorization.

In closing I would again like to congratulate our new designees who have joined the ranks of insurance professionals dedicated to maintaining the high standards needed in our industry.

1 Rachel Cleetus, “Sandy exposed flood insurance failure,” October 27, 2013.

2 Ibid.

3 Ibid.