Needham, Mass. – Despite 2008 being an election year, insurers can ill-afford to let pressing regulatory issues lose momentum. That’s the conclusion of Karen Pauli, senior analyst, insurance, for Needham, Mass.-based TowerGroup and author of “2008 U.S. Insurance Regulatory Agenda: Will the Upcoming Elections Quell the Drive for Reform?”
Pauli cites three issues that roiled the industry in 2007–reform of the National Flood Insurance Program (NFIP), establishment of an optional federal charter and the extension of the Terrorism Risk Insurance Act (TRIA)–also playing a big role in 2008.
Pauli says political infighting coupled with historically low losses due to catastrophe the past two years has taken away the sense of urgency from reform initiatives, especially overhaul of flood insurance. “The National Flood Insurance Program has needed overhaul for years,” she says. “The aftermath of Hurricane Katrina highlighted the deficiencies of the program in sad, wrenching detail. The sting of Katrina was still fresh in 2006, and it appeared that the program was finally going to get the attention it critically needed. That did not happen.
To move forward on flood reform, Pauli says the industry needs to temporarily lay aside the issue that caused reform efforts to stall in 2007–the inclusion of wind coverage–and instead focus on remapping, enforcement of requirements in flood zones and making sure that rates are actuarially sound. “Remapping is key to establishing the eligibility of at-risk structures, and will take approximately five years to accomplish,” she says. “Because of development in coastal areas and changes in land contour over the years, many structures are legitimately in flood zones, but have not been designated as such. Until a structure is designated as eligible, flood coverage cannot be obtained through the NFIP.”
Much as inclusion of wind coverage clouds efforts concerning NFIP, the extension of TRIA was imperiled by efforts to expand the program. While a TRIA extension was passed late in 2007, provisions to include coverage for nuclear, biological, chemical and radiological (NBCR) attacks, as well the inclusion of group life coverage, were removed from the final legislation to avoid a presidential veto. Pauli says that efforts to include NBCR and life coverage in TRIA need to be rejoined.
Pauli also says that the push for an optional federal charter is equally important for insurers facing the challenges of a global economy, but is likely to be stymied by election-year politics.
“Because of the upcoming U.S. presidential election, 2008 will be a tough year in which to make meaningful change, but U.S. carriers cannot sit back waiting for 2009 to start working again on programs that impact so many in such traumatic situations,” she says.
While carriers presently have plenty of regulatory requirements to consider, others lurk ahead. One such is Solvency II, a set of requirements by the European union that forces carriers to account for their risk management strategies. While the requirement does not impact American carriers directly, rating bureaus also are increasingly seeking similar transparency.
“Solvency II and the requirements of rating bureaus are forcing carriers to adopt enterprise risk strategies, and IT must create ERM platforms or fall behind,” says David West, research area director of TowerGroup's insurance practice.
Yet, while regulatory concerns do make the cut, they are in the middle of a list of the top 10 insurance business drivers that TowerGroup compiles annually. For 2008, regulatory concerns take a back seat to profitable growth, competitive advantage, financial stability, changing consumer demands and globalization.
In January, West also presented the top 10 technology initiatives for the insurance industry i th coming year. Leading off the list was collaboration and knowledge management systems, followed by demand management and enterprise risk platform implementation.
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