PLAYER’S POINT
The Perfect Storm
By Thomas A. Player

With apologies to Sebastian Junger¹, who wrote a book about the convergence of two awesome forces, and to George Clooney, who piloted his boat, the Andrea Gail, to the bottom in the movie version of the same tale, I write this as two awesome forces are building to converge.

First, there are the forces of nature. Hurricanes as far as the forecasters can see: Gustav, Hanna, Ike, Josephine and beyond.

Second, there are the forces of politics. Two political parties locked in a close race for the Presidency, in which Florida and other coastal states play a pivotal role in this election.

This season, it is not the Andrea Gail which is the object of these mighty forces, but the National Cat Fund.

For the first time in history, both political parties have embraced the concept of a National Catastrophic Insurance Fund. As expected, the platforms within each Party differ.

The Democratic Party Platform provides, “We will also work to prevent future catastrophic response failures, whether the emergency comes from hurricanes, earthquakes, floods, tornadoes, wild fires, drought, bridge collapses, or any other natural or man-made disaster. Maintaining our levees and dams is not pork barrel spending - it is an urgent priority. We will fix governmental agencies like the Federal Emergency Management Agency, ensure that they are staffed with professionals, and create integrated communication and response plans. We will reform the Small Business Administration bureaucracy, and develop a real National Response Plan. We will develop a National Catastrophic Insurance Fund to offer an affordable insurance mechanism for high-risk catastrophes that no single private insurer can cover by itself for fear of bankruptcy. This will allow states and territories to deal comprehensively with the economic dislocation of natural disasters.” (Emphasis added.)

The Republican Party Platform provides, “Americans hit by disaster must never again feel abandoned by their government. The Katrina disaster taught a painful lesson: The federal government’s system for responding to a natural calamity needs a radical overhaul. We recognize the need for a natural disaster insurance policy. State and local cooperation is crucial, as are private relief efforts, but Washington must take the lead in forging a partnership with America’s best run businesses to ensure that FEMA’s Emergency Operations Centers run as well as any Fortune 500 company. We must make it easier for both businesses and nonprofits to act as force-multipliers in relief situations. We believe it is critical to support those impacted by natural disasters and to complete the rebuilding of devastated areas, including the Gulf Coast.” (Emphasis added.)

Senator Obama is in synch with his party’s platform when he favors “a national catastrophic insurance fund to offer an affordable insurance mechanism for high-risk catastrophes that no single private insurer can cover by itself for fear of bankruptcy.”

Senator McCain, however, on August 19, 2008, said that he was not prepared to endorse a national risk pool but, instead, favors some form of regional alliance. This was certainly disappointing news to Florida Governor Charlie Crist, a strong McCain supporter.

The stage appears to be set for The Perfect Storm. As the pressure builds during this hurricane season and political season, it will be fascinating to learn how this issue evolves.

As I reported in my Winter 2007 Player’s Point, the U.S. House of Representatives passed H.R. 3355², the Homeowners Defense Act, calling for a system of Treasury loans and reinsurance to state cat funds and residual markets. The measure has failed to gain traction in the Senate.

As we lawyers are prone to say: “The devil is in the details.” Nowhere is this more applicable than in a discussion of a National Cat Fund.

Here are some areas where the details are sure to get sticky:

• Coverage
  What constitutes a catastrophe? Is it a natural disaster only? The Democratic Platform is the most inclusive of types of coverage. However, the Terrorism Act³ is a form of Cat Fund. Where do we draw the line?
• Level of “Back-Stop”
  Our Citizens have come to expect government assistance for incidental losses following a natural disaster. What is a reasonable expectation for personal responsibility, including private sector insurance? Where should the government “back-stop” begin?
• Form of Assistance
  We should be clear on whether government assistance is a loan, a subsidy or a combination, as the Terrorism Act contemplates. There, a portion of the loss is intended to be recouped by future insurance premiums.
• Catastrophic Coverage versus Emergency Relief
  How will Congress discipline itself not to double dip? By that I mean, what if Congress devises a well thought-out plan to provide high level coverage in the event of catastrophe only to rush billions of dollars in similar funds under the auspices of emergency relief?
  

Stay tuned. Will George Clooney be found floating in a life boat? Will John McCain come to understand the wisdom of a National Cat Fund? Will Congress apply a Band-Aid or seriously look at a serious problem?

Thomas Player is a senior partner in the Insurance and Reinsurance Practice. His areas of expertise include insurance and reinsurance, mergers and acquisitions, complex regulatory issues and dispute resolution. Tom received his bachelor’s degree from Furman University and his law degree from the University of Virginia.

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