High-Water Marks

By Kathleen Kingsbury

One year after Hurricane Katrina ravaged the Gulf Coast, insurance companies have settled 95% of homeowners' claims, paying out $16.4 billion. But the industry remains mired in related lawsuits, which could raise prices and lower availability. Allstate CEO Edward Liddy tells TIME's KATHLEEN KINGSBURY how his business must evolve to keep underwriting the American Dream.

Grade Allstate's performance post-Katrina.

The promptness with which we got down there and began the claims adjusting and handling process was second to none. We've taken a leadership position to advance national catastrophic coverage. So I would give us high marks on both what we do as a business and trying to influence the public-policy debate.

But the industry hasn't won great praise.

There are a couple of players that are what I call real insurance companies, and they got out there early and did the right thing. Then there are other players that are more interested in just collecting the premiums and not in resolving claims or issues when they occur. But on balance, given how large and impressive this event was, I would give the industry high marks. Public perception is very influenced by lawsuits that a few people have filed. But if you talk to people in Louisiana, Mississippi and Texas, there's a much greater level of satisfaction.

Given all these satisfied customers, why is Allstate pulling back in coastal states?

Are we prepared to write and extend additional coverage in some states? We are not. Not until there's much more clarity around whether those states are going to honor the insurance contract.

Clarity over what?

Are they going to honor what's been the typical [differentiation] between wind and water? Sometimes that means where risks have gotten much higher than they used to be, we simply can't continue to write down there. For a while, Florida had a thousand families a day moving in, home values have escalated rapidly, and yet the rate increases we're allowed to charge [by state regulators] have not kept pace with that. So we've made some hard decisions and scaled back our coverage in Florida, the Gulf Coast and in some of the exposed areas in New York. We've raised our rates where appropriate, and we've got different deductibles. We've also added a lot of reinsurance in our business at a very substantial cost that enables us to continue to write in most areas.

Allstate faced a strong backlash from state officials when it proposed ending hail and wind coverage in Louisiana.

The reality is that we are regulated by 50 different states. They place regulations on us in terms of what we can charge. They regulate the form of the contract. They regulate where we're allowed to write, where we're not allowed to write.

Allstate has asked the government to pay for future hurricane damage. Isn't that abdicating your obligations?

We're not suggesting the government pay at all. We're suggesting that people who live in harm's way pay the full price. For events that happen more frequently, insurance companies should absolutely provide coverage. When you get to the very large events that happen more infrequently, those events should be covered by a state pool funded by all its citizens through an additional charge on insurance premiums or whenever a real estate transaction occurs. What we're advocating is, Let's be smart and do it up front and have the people who live in harm's way provide much of the pooled relief and then have the Federal Government stand in when there are the really large, tsunami kind of events.

How would that change insurance?

More carriers could write in exposed areas because their exposure could be quantified. Over time, the coverage would be less expensive, because states don't pay taxes on the money they build up in these pools. Insurance companies do. If you go through a couple of years with no major events, those pools could get quite large, quite quickly, which means, in theory, prices could go down for consumers.

How can the average consumer expect insurance coverage to change post-Katrina?

The average consumer can expect very little change. But if you live in Florida, it's going to be a very difficult situation in terms of the availability of insurance and the price of insurance. If you live in some of the exposed areas of Georgia or the Atlantic seaboard, insurance is going to be much more expensive.

When stuff happens, we expect help. Is there an easier way to get it?

Americans are so optimistic. They always assume, It's not going to happen to me. In places where there is a high frequency of these very catastrophic storms, there has to be much better disaster-preparedness education. People need to read their insurance policies more closely. Insurance is one of those things you buy because you think you have to. You don't buy it because you fall in love. But a home is usually 35% to 50% of your net worth. People have to spend time understanding what coverage they have, as opposed to just buying the policy, throwing it in a drawer and not doing anything with it for 10 or 15 years until they need it.

Can the industry's rep weather this storm?

You can't do anything in the United States without insurance. There would be no cars, subways or buses if there weren't insurance. Buildings wouldn't stand. There wouldn't be any food, waiters or restaurants. It'd be great if more people recognized that what insurance companies do is really underwrite the great American Dream. The industry will be just fine. But much better preparedness and a much better way of dealing with these catastrophic events would go a huge way toward not just improving the image of the industry but making people feel like they are ready when these events occur.