Natural Disasters, Fires, Floods, Fair Conduct Fueled Insurance Industry Discussions in 2007

While 2007 was surprisingly calm year for hurricanes, that doesn’t mean Mother Nature didn’t have a tantrum or two. In the past year, the West faced its share of disasters, with freezes, floods and fires making news headlines from California all the way to Colorado. In fact, you might even call it a disastrous year, as insurance professionals, regulators and state legislators and consumers debated topics such as funding for the California Earthquake Authority and the rezoning of flood maps.

Following are the top news stories that occurred in the West in 2007, as picked by Insurance Journal‘s editors.

1. California Cold

The year started off unseasonably cold, as temperatures dropped down below freezing in January 2007. Of particular concern were agricultural and citrus crops in California that faced heavy damage as the mercury dipped into the low 20s and teens.

With about 3,000 farmers — 90 percent of California citrus growers — getting some insurance payout from the cold snap, according to Bob Blakely, director of grower services for California Citrus Mutual, state Insurance Commissioner Steve Poizner feared the high number of insurance claims would create a shortage of qualified insurance adjusters. Thus, Poizner declared a state of emergency, relaxing rules so adjusters from other states could come into the Golden State to help process claims quickly.

State politicians also worked to secure aid for the 12,500 workers who faced potential job layoffs because they were not needed to process fruit with the crop damage.

2. Flood Zone Remapping

Hurricane Katrina and the New Orleans Flood were wakeup calls on the vulnerability of the nations’ levee systems. So, the U.S. Army Corps of Engineers inspected levees throughout the country, noting the West had the lion’s share of unacceptable systems. According to the Corps, California had 33 unacceptable levees, Washington had 19, Oregon had five, Hawaii three, Alaska two, Colorado two, New Mexico three, and Idaho one.

Taking the information into account, states began making necessary improvements. Meanwhile, the Federal Emergency Management Agency began redrawing its flood maps, expanding areas designated as 100-year flood protected.

Property owners near levees in California, Arizona and other states were affected by new flood maps, and faced an increasing need to have their mortgages backed by the purchase of federal flood insurance.

Thus began a major debate. Whose responsibility is it to take on potential flood problems when homeowners and contractors with properties in areas that FEMA initially assured were sound — found their properties rezoned?

Stay tuned for the answer in 2008.

3. Earthquake Efforts

San Jose, Calif., faced a 5.6 magnitude tremblor this year, the largest earthquake to strike the San Francisco Bay area in nearly two decades. The damage was minimal. So although the quake was a gentle reminder of the 1868 Hayward earthquake — which celebrated its 139th anniversary just days earlier — few seemed rattled.

The fact that Californians don’t take earthquakes seriously is a serious problem, according to Commissioner Poizner, lamenting the poor take-up rate for coverage offered through the California Earthquake Authority. Poizner vowed to analyze the CEA, the largest privately financed and publicly managed cat pool in the country.

Meanwhile, the industry and legislators were able to compromise on a bill to fund the CEA with $1.3 billion in insurance industry assessments.

Insurance companies that sell CEA policies currently contribute funds to the CEA to help it insure for a 600-year event, and the assessment layer was set to expire in December 2008. The new legislation gives the CEA capacity to pay claims from a one-in-500-year event. The compromise bill prevented the CEA from potential solvency, as well as reinsurance and rating problems.

“In the end, a fair deal was needed in order to ensure that the participating insurers wouldn’t fight the bill in the Legislature and, equally important, to ensure that the participating insurers would sign their contract modifications to agree to the additional $1.3 billion liability,” said Rex Frazier, president of the Personal Insurance Federation of California.

4. Fight Over Fairness

Washington faced one of its most contentious and expensive insurance battles in history, in the fight over the Insurance Fair Conduct Act, or Referendum 67.

In 2007, the state legislature enacted a law allowing insureds to collect triple damages if their insurer unreasonably denies a claim or violates unfair practice rules. While the legislation was approved and supported by Insurance Commissioner Mike Kreidler, the industry believed the law would lead to frivolous lawsuits. More money and time spent fighting or settling lawsuits would mean costs would be passed onto consumers, the industry indicated.

As such, insurers took the issue to the voters, putting Referendum 67 on November’s ballot. The insurance industry hoped consumers would overturn the law, if they recognized that the measure could increase insurance premiums an average of $205 per year.

Costly campaigns were created to sway voters leading up to the election. Trial lawyers and insurance companies spent nearly $14.5 million just days before ballots were tallied.

In the end, 57 percent of voters approved the law. Supporters said the referendum fit with voters’ pocketbook-first mentality that if they pay for an insurance policy, they expect to get paid when they submit a claim.

The National Association of Mutual Insurance Companies has vowed to work with legislators in 2008 to repeal the law.

5. Auto Rate Regs

Following a lengthy fight between California’s Department of Insurance and insurers, auto rates began changing in 2007. In July 2006, the DOI adopted new auto rating factor regulations, stipulating that rates must be based primarily on three factors: driving record, number of miles driven, and years of driving experience. Under old regulations, rates could factor in other optional factors, such as marital status, gender and ZIP code. Thus, insurers were forced to phase-in rate changes in 2007.

“The law in California is crystal clear, and people want auto insurance rates based on some fairness. Auto insurance premiums should be based on how you, the driver, drive, and not how your neighbors drive,” Commissioner Poizner said. “Where the driver lives is still a factor because that’s important if you do live in an area where there are a lot of accidents, a lot of vandalism … but the most important factor should be your driving record.”

6. Wicked Wildfires

Devastating wildfires in Southern California burned up $1.6 billion in claims in October. At the height of the siege, 23 fires burned in seven counties, destroying more than 2,000 homes and forcing thousands into 28 evacuation shelters. At least 14,000 insurance claims were filed, according to the Insurance Information Network of California.

Just weeks later, Malibu, Calif., faced a second round of fires, in which 49 homes were destroyed and thousands were evacuated.

While California wildfires were not the most devastating in terms of insured losses, there’s no question there’s a bigger potential for wildfire perils.

The 11 western states faced at least 1,000 blazes this summer, following one of the worst droughts in decades. Furthermore, analysts predict as people increasingly move into the wildland/urban interface, the buffer zone where human development intersects dense woodland vegetation, losses will be greater. According to U.S. Fire Administration statistics, nearly 40 percent of new home development in the West is in the WUI.

7. Shake-up at SCIF

California’s State Compensation Insurance Fund faced major setbacks in 2007, with the firings of then President James Tudor and Vice President of Group Programs Renee Koren. Officials said the oustings were the result of questions over unethical practices in group programs.

Thus, SCIF began an internal audit; the California Highway Patrol, Department of Insurance and San Francisco District Attorney’s Office began a joint investigation of allegations of potential misconduct by former employees; and the DOI created a task force to review the operational structure and functions of the state workers’ comp insurer.

At press time, SCIF’s new president, former CNA Financial executive Janet Frank, was implementing changes from its internal audit, and the insurer was deemed to have “weak corporate governance, inadequate internal controls in various areas and a general inability to plan for the long-term,” according to the DOI.

8. More Water Woes

It seems the west coast was deluged with water toward the end of 2007. Insurers say they’ve received hundreds of claims from consumers, whose homes and businesses were affected by powerful Pacific storms that smashed ashore along the Oregon, Washington and British Columbian coasts in early December. During the height of the storms, winds generated seas up to 48 feet high in some areas, and hurricane-force winds brought torrential rains and widespread flooding. The damaging wind and rain emphasized the need for flood coverage.

Topics California Catastrophe Natural Disasters Carriers Auto Legislation Claims Wildfire Flood Washington Market Earthquake