AIA Opposes Connecticut CAT Fund

The American Insurance Association (AIA) provided testimony today in opposition to Connecticut Senate Bill 530, legislation that would establish a state-mandated catastrophe (CAT) fund in Connecticut. The testimony was presented at a hearing before the Insurance and Real Estate Committee.

“Natural catastrophe remains a manageable and insurable risk for private insurers, provided they have the proper underwriting, rating, and risk mitigation tools,” said Laura Kersey, AIA northeast region assistant vice president. “Nonetheless, some state public policymakers have proposed supplanting the role of the private insurance system through the creation of state Cat Funds and other government solutions that would undermine efforts to reduce risk and to encourage personal responsibility.”

According to AIA’s written testimony opposing Senate Bill 530, all states face some natural catastrophe risk, but the type and magnitude of the risk varies greatly by state, by regions within a state, and by type of policyholder.

“It is unfair to expect inland residents to subsidize coastal development and beachfront property, or small businesses to subsidize homeowners - yet such subsidies are integral to the design and financing of state CAT Funds,” said Kersey.

AIA pointed out that Florida is the only state that has taken the gamble that a government-imposed mechanism can provide coverage more effectively than the private market. However, in the aftermath of the devastating hurricanes of 2004 and 2005, the Cat Fund ran out of money.

“The deficit is now being paid off by a hurricane tax on most policyholders in the state, including many residents and businesses that are located in less risky areas, and may not even have been in the state when the hurricanes struck,” explained Kersey. In some hurricane scenarios, those assessments could last up to 30 years. “Fortunately, the private property and casualty insurance industry is well-positioned financially and operationally to manage natural catastrophe risk,” concluded Kersey.