A New Approach on Property and Casualty Insurance for the 21st Century

Published June 26, 2008

Insurance is one of the key institutions that drives an economy. Without insurance to protect individuals from fraud and reduce financial risk, many of the business transactions we take for granted today would be impossible.

This nation is at a crossroads with respect to insurance policy. The next few years will decide the future of insurance regulation—whether it will remain under the jurisdiction of the states or whether regulation will migrate to the national level.

Louisiana is taking a new and rational approach with respect to its property and casualty coastal hurricane exposure risk.

Currently, the state requires insurers to set a statewide deductible, which means the deductible charged to homeowners inland is equal to what is charged to homeowners living near the Gulf Coast, despite the vast and obvious differences in risk. These regulations are designed to spread risk in the event of a major storm. Such policies favor the coastal regions of the state and discourage many insurers from selling policies instate.

Louisiana is considering policy changes that would allow insurers to modify their named-storm deductible rates based on a home’s proximity to the Gulf Coast. Proposed by Sen. Donald Cravins Jr., D-Opelousas, the new approach contains some provisions designed to protect costal consumers, including a cap on any deducible increases and commissioner approval power over changes in the deductible.

Measure may affect how much you pay for insurance

The benefits of the proposed changes are twofold: first, they open the market for new competition, which lowers rates; and second, they discourage new building construction in coastal areas, which lowers the overall risk posed by a major storm. While not perfect, the new proposal allows insurers to react to changes in risk and remain profitable, which is vital to ensuring that claims will be covered in the event of a major storm.

Given the difficulties faced by the state over the past decade, Louisiana needs a property and casualty insurance regulatory system that is able to react and adapt to sudden and dynamic change. These proposals are a good first step towards maintaining long-term solvency.

As you work to stay on top of this key issue, the following articles may help by providing further information on insurance regulation modernization efforts and the proposed Optional Federal Charter.

The Case for Underwriting Freedom: How Competitive Risk Analysis Promotes Fairness and Efficiency in Property/Casualty Insurance Markets
Robert Detlefsen comments on the effect of increased competition on property/casualty insurance markets. Published by the National Association of Mutual Insurance Companies (NAMIC).

Insuring against Regulatory Catastrophe: Compound, or Compact?
The Institute for Policy Innovation examines some of the options available for regulating insurance in the new global economy.

Efficiency Consequences of Rate Regulation in Insurance Markets
This paper by the Network Financial Institute critically examines the arguments for rate regulation and discusses the consequences of this regulation for the insurance marketplace.

State-Run Insurance Is Bad for Florida Citizens
Trevor Martin, vice president of government affairs for The Heartland Institute, comments on the effects of state-run insurance in Florida.

Optional Federal Charter for Insurers: FAQ
Competitive Enterprise Institute Senior Fellow Eli Lehrer provides a free-market perspective on the Optional Federal Charter.

Optional Federal Charter: A Remedy for America’s Antiquated Insurance Regulatory System
Craig Berrington, senior vice president and general counsel for the American Insurance Association, examines the weaknesses in our current regulatory system and explains how an Optional Federal Charter may address those shortcomings.