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Lender's Catastrophic Insurance Requirements

    Reinsurance

    • Lenders use a process of issuing reinsurance. Total annual premiums and total losses become split and held between the direct insurer and the re-insurer. This action reduces the size of potential losses. Re-insurance is beneficial to both parties involved, although the risks are high, depending upon the market. If it should fail, nothing prevents the re-insurer from taking the surplus and bailing out (see Reference 2, page 14, paragraph 3 through 5).

    Bond Instruments

    • To provide capital to an insurance company, investment banks have developed bond instruments in advance of a catastrophe. Interest rates on these bonds become a business expense to the insurance company. Whenever the interest rate rises, this gives the insurance company justification to raise premiums. The more the insurance company uses the capital market, the less the bonds follow a premium strategy, which makes it easier to determine if a rate increase is justified as stated by the Wharton Financial Institutions Centers. These bonds are known as Act of God bonds (see Reference 2, page 15, paragraph 2 and page 16, paragraph 1).

    Renegotiation

    • Lenders can renegotiate loan terms for properties, since default rates will rise during large uninsured losses on mortgaged structures, called forbearance. Lenders can also make cash payments for incurred losses, advancing the amounts necessary for reconstruction but toward the mortgage debt of the property owner (see Reference 2, page 19, paragraph 3 and 4).

    Legislation

    • State regulators, Congress, policy holders and insurers have gathered to introduce legislation to address the issues concerning catastrophic insurance. The Homeowners Insurance Availability Act of 2007 requires the availability of homeowner's insurance for market pooling and spreading the risk of the financial losses during catastrophic disasters, as well as developing solvency for the home owners insurance markets, according to the Library of Congress (see Reference 4, paragraph 2). The Homeowners Insurance Protection Act of 2007 requires re-insurance coverage contracts to provide insurance coverage against losses to residential property and apartment building contents (see Reference 3, paragraph 3). The Policyholder Disaster Protection Act of 2009 allows tax- deductible contributions by insurance companies to be given toward tax-exempt policyholder disaster protection funds (see Reference 5, paragraph 1).

    Principles

    • The public and private casualty insurer principles concerning the affordability and availability of property insurance, as supported by the Mortgage Bankers Association, should confirm to ensure no interruption of coverage; make no unreasonable large deductibles concerning premiums; and preserve insurer's responsibility in notifying policy changes such as coverage cancellation, coverage lapses or renewals. The casualty insurers should also provide Evidence of Insurance with a summary to all those insured listed on the policy: covered or excluded perils, dates of expiration and initiation, and limits to coverage. Insurers need to make affordable price insurance coverage available for every peril other than those not considered natural disasters, such as power failures, acts of war, property neglect and intentional issues. For areas prone to certain regional disasters, such as mudslides, earthquakes and flooding, private/public sector insurance policies should provide coverage at a reasonable additional cost and have adequate insurance limits concerning the property's risk exposure (see Reference 1, page 4, paragraph 7 through 11).

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