|A dramatic increase in the number and ferocity of hurricane landfalls across the lower U.S. in recent years has reduced entire communities of homes to splinters and otherwise wreaked catastrophic damage.
The Allstate push involves newspaper and op-ed pieces nationwide, including a full-page ad showing a watercolor rendering of San Francisco’s Bay Bridge and cable cars set inside a snow globe to illustrate its message: A major earthquake could shatter San Francisco and cause $400 billion in damage.
The ad’s setting was carefully chosen, given that the city this week hosted a two-day summit organized by state insurance commissioners intended to hammer out a consensus among regulators, insurance commissioners and industry leaders for developing catastrophe funds.
“We need to establish a financial backdrop,” said Edward Collins, managing counsel at Allstate and leader of the insurer’s lobbying efforts. “The private market is very efficient at providing protection, but not for mega-catastrophes.”
Although a similar industry effort followed the Sept. 11 attacks, the spate of natural disasters in recent months -- and the major losses endured by insurers -- has given the idea new steam. Allstate is on the forefront of the push and Mr. Collins is not mincing words about the crisis the industry faces. “If the industry is wiped out and we continue to live in a fantasy land and deny reality, we jeopardize completely the private market.”
The doomsday rhetoric isn’t surprising, considering Allstate is reeling more than any other insurer from property and casualty losses. The insurer’s catastrophe losses totaled $4.7 billion in the third quarter this year and Allstate reported a $1.5 billion third-quarter loss that it blamed on hurricane-related claims, including Katrina and Rita.
“It was a substantial loss,” said Anthony Diodato, VP-property and casualty ratings at industry research firm A.M. Best. “If there had been catastrophe funds, that could have been less.”
Today, during a conference with investors, Allstate CEO Edward Libby said the company is planning double-digit rate increase in hurricane-prone areas like Louisiana and Alabama.
So far, Allstate is considered the worst hit insurer. State Farm is expected to release results soon.
The $1.5 billion loss explains Allstate’s out-front stance on the issue, according to some industry watchers, especially since it is facing pressure from shareholders to do something. The campaign is also a way to stem damage to its brand, according to industry observers, which is likely taking a hit with consumers as the insurer withdraws property and casualty coverage from coastal Gulf areas. Consumers who are denied homeowner’s insurance are likely to take their auto insurance business elsewhere as retribution, they said, which could lead to losses in its most profitable division.
Progressive CEO Glen Renwick sees defecting consumers as an opportunity for the No. 3 auto insurer, already nipping at Allstate’s heels, to pick up market share in coastal areas.
Allstate, moreover, runs the risk of bearing the brunt of any potential consumer backlash against the creation of catastrophe funds -- especially if the debate becomes polarized.
Bob Hunter of the Consumer Federation of America, questions the motivations of Allstate’s campaign. “They want to make all the profits on the good risk and throw all the bad risk into the taxpayer pockets,” he said. “The insurers are motivated only by profit.”
Mr. Collins of Allstate admits the consumer-education side of this push won’t be easy and said it may need to expand to a broadcast push, including a series of TV spots, early next year.
“We are not concerned that there may be some that don’t totally agree with this proposal, that’s just reality. Not everyone is likely to agree with every detail,” he said.
Although State Farm said it supports the creation of national catastrophe funds, it’s taking a back seat to Allstate’s efforts. “We are not as proactive as Allstate, but we certainly are in support of this,” said Phil Supple, a spokesman. “It’s an important issue Allstate has brought up.”
Todd Bault, an insurance analyst with research firm Bernstein & Co., said insurers, especially publicly traded companies like Allstate, are pushing for catastrophe funds to smooth out the cycles of boom and bust since managing risk against mega-catastrophes is almost impossible.
“The more and more rare an event is, i.e. 9/11 and this season’s storm losses, there’s no way to price this kind of risk, even over the long run, you can’t calculate it,” he said.