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2006: A look back - A look ahead  
  A quiet 2006 produced record profits for insurers but a number of scenarios could trigger a disastrous 2007 with $100 million or more in claims.
 Personal finance calendar  Personal finance calendar 

Many factors impede '07 insurance rate drops

Worst-case scenarios aside, other issues are also conspiring to keep insurance rates from falling in 2007.

First among those factors is the stock market. Even though the Dow Jones Industrial Average is hitting new highs, insurance executives worry the stock market cannot sustain its recent run and some of those gains will be given back.

Stock value increases are important because insurance companies invest their reserves in stocks and other equities. Earnings from those investments help subsidize rates consumers pay.

If stocks don't continue to grow, insurers must rely more on premium payments to support claims, which translates into higher costs for consumers.

Another issue that might tighten access to insurance is the scheduled expiration of the Terrorism Risk Insurance Act, put in place following the Sept. 11, 2001, terrorist attacks.

The act was intended to serve as a backstop for insurance companies and cap their potential losses. Lawmakers designed the act to encourage insurers to write large commercial policies when none were willing to take on the potentially catastrophic risks. That act is scheduled to expire in December 2007.

Opponents of the bill, such as the Consumer Federation of America, claim it is no longer necessary because commercial insurance markets can now fully assume the risk.

Supporters of the bill, such as Jim Donelon, insurance commissioner for Louisiana, say that not only is the bill necessary to ensure a competitive insurance marketplace, but that a second federal backstop should be put in place to protect against the potential losses from a major natural disaster.

"If we could get that in place, companies would feel comfortable to continue to write coverage for hurricanes, terrorist attacks, etc., because they would know what their maximum exposure would be and they could price accordingly," he says.

Such a move could not be made without overcoming significant resistance, especially from regions, such as the Midwest, who would be essentially subsidizing the insurance rates for more at-risk regions.

But Donelon counters that 70 percent of the nation's population lives along the costal regions and in high-risk regions.

"One of these days an earthquake will do more damage to San Francisco than Katrina did to New Orleans. And when that happens, I sure hope we have a national backstop in place," he says.

And while he supports the idea of a federal backstop, Donelon acknowledges it would be an uphill battle to put it in place.

"There's plenty of resistance to the idea," he says. "Congress and the White House are even hesitant to renew the Terrorism Risk Insurance Act because of how much of a potential hit it could mean to future budgets."

Michael Giusti is a freelance writer based in New Orleans.

-- Posted: Nov. 1, 2006
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