S.C. chief urges hurricane damage formula – before storms hit

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South Carolina Insurance Director Scott Richardson is proposing a loss-allocation method that he hopes will alleviate any confusion between water damage and wind damage the next time a hurricane reduces buildings to concrete slabs.

Concern about ongoing Katrina litigation and the payment process prompt Richardson to ask, “What can we do to keep it from happening next time?”

His answer is to do the work before the damage happens.

“When there’s not even a toothpick left, who knows what really caused the damage?” Richardson asked. “It has resulted in thousands of lawsuits in Louisiana and Mississippi — they’re figuring it out as they go and making settlements. Why can’t we do that before hand with a formula based on science and available technology? There’s got to be one we can all agree on.”

Using the latest flood maps, tidal surge history based on geography and potential wind speed models, Richardson believes a workable formula can be developed. “It might not be perfect but it could be reasonable,” he said.

Richardson took the first step when he presented his proposal to the National Association of Insurance Commissioners in Washington, D.C., last month. He said the next step is to get actuaries to share their loss data from Katrina. “I envision a one- or two-day conference where we would drill deep into every aspect,” Richardson said. “Everyone would have a seat at the table.”

Richardson suggests that by speaking only about establishing a predictability formula — not rates or prices — that the typical barriers between professions or politics would be set aside.

In Richardson’s view, a pre-established formula would help to bring resolution to the insurance industry’s two most pressing and important issues.

“The consumer gets his money immediately and that equates to happy customers,” Richardson said. “When consumers buy a policy they expect to get paid in the event of a payable occurrence.”

For insurers, Richardson said, a formula would create predictability. “Insurance is all about predictability. If you can predict it, you can insure it,” he said.

If an insurer can pinpoint probable maximum loss versus a reinsurer’s 100 percent loss method, the cost of reinsurance will go down too, Richardson added.

A pre-established formula takes mystery out of the payment process, according to Richardson.

“It’s a tall order but we have to do it. The technology is already there — we just have to plug it in,” Richardson said. “What we’re doing now is not working. When in doubt — after the next Hurricane Katrina — we can just go to the formula.”

Richardson concedes that the National Flood Insurance Program will have to buy into the concept.

But he maintained that the existence of the formulaic process would encourage people to buy flood insurance.

“We need to make flood maps more accurate — in the most catastrophe-prone areas,” Richardson said. “The technology is there.”

Topics Catastrophe Natural Disasters Windstorm Flood Hurricane South Carolina