The repercussions from Hurricane Katrina have not yet died down, and the effects may reach much farther than the need to rebuild.

Insurance companies are on the defensive. Irate homeowners, incensed at what they see as desertion by their insurers, are suing for the money to restore their homes in the wake of claims denials. Equally irate legislators, led by, among others, Senator Trent Lott (R, Mississippi), are pushing for a change in the law that exempts the insurance industry from federal antitrust oversight. Lott lost his own home, and his insurer, State Farm, declined his claim. Now he, and a bipartisan group in both chambers of Congress, are exploring the possibility of subjecting the industry to greater federal oversight.

The reasons for this threatened Federal footprint on the industry?

Claims reduced or denied outright by insurers, who said that most or all damage was caused by uninsured flooding rather than covered wind.

Steep increases in homeowner rates, or unavailability of coverage, as insurers lower their own risks, ceasing to write new policies in coastal and other disaster-prone areas (think California and earthquakes) and substantially raising premiums for the policies they do retain.

Language in policies that confused homeowners, particularly with regard to anti-concurrent clauses. These state that if any damage is caused by an “excluded peril,” then the insurer need not pay the claim even if other damage was caused by a covered peril.

Alleged assurances by agents that homeowners were covered by their current policies.

An End to Antitrust Exemption?

This has led to the conditions ripe for more regulation of the industry, with lawsuits filed amid allegations of criminal misconduct. But the effects may go farther than that. Lawmakers are considering bills introduced in both the House (H.R. 1081) and the Senate (S. 618) that would repeal the McCarran-Ferguson Act, which offers the insurance industry exemption from federal antitrust oversight as long as they are regulated at the state level. This has been beneficial in the past, according to Claire Wilkinson, VP at the Insurance Information Institute (III), because it “allows insurers to pull historic loss information and charge an accurate price for their product. Buyers of insurance everywhere benefit by getting premiums in line with their individual risk.”

While many coastal homeowners might dispute this statement, Wilkinson adds that a repeal of McCarran-Ferguson “would likely reduce competition, increase the cost of insurance, and reduce availability for some coverages–high-risk coverage, probably.” She adds that McCarren-Ferguson is “designed to ensure the preeminence of state regulation,” rather than allowing the insurance industry freedom from federal antitrust laws. Larger insurers, she says, can enter new markets in new states with pricing appropriate to the market through use of the pooled data available to them. Smaller insurers benefit also, she says, because they don’t have the resources “to accurately price coverage.” This would mean that without access to pooled data, insurers would be less able to compete effectively and be “more prone to insolvency.”

Dueling Legislation

Wilkinson also points out that the Act “avowed the use of standard policy forms across the industry,” which “has significant benefits for insurance buyers” by allowing them to comparison shop on a more level field.” But legislators, concerned about constituents who cannot find or afford insurance or who cannot rebuild after the disaster, are seeking ways to exercise tighter control over insurers. If these bills become law, however, insurers say there will be consequences throughout the insurance industry–not just for homeowner’s insurance.

One industry fear is that the Federal Trade Commission will begin looking further afield than property and casualty insurers, perhaps considering life insurance or other types of insurance. One provision would allow the FTC to conduct insurance industry studies. In 1979 the FTC had released such a study on the life insurance industry that was very critical of its practices.

The industry isn’t sitting idly by, however. It has its own plan for legislation, including the formation of a federal backstop that will require the government to step in if losses become too great.

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