WHAT IS the proper role of government in insuringdisasters--both natural and man-made? That has been one of 2005'sgreat debates in the insurance business. This year's unprecedentedhurricane season has renewed calls for a federal backstop forhurricanes and earthquakes, while the approaching expiration of theTerrorism Risk Insurance Act of 2002 has forced Congress to decideto what degree the government should continue to be an insurer ofevents like 9/11.

Let's consider TRIA first, which was set to expire on Dec. 31.It is my fervent hope that by the time you read this, TRIA willhave been extended. Certainly, at the time this was written, thesigns were propitious. Both the House and the Senate had approvedlegislation to renew the program and were expected to meet to ironout differences in the two bills earlier this month. Meanwhile, theWhite House, despite taking a hard line throughout the year, wassaid to be interested in reaching a deal that would be popular withbusiness constituents.

The House and Senate bills gave different answers to thequestion I posed in the first paragraph, with the former moregenerous to insurers than the latter. Currently under TRIA,coverage is triggered upon the certification of an act of terrorismcausing $5 million or more in losses. Insurers pay a deductibleequal to 15% of their direct earned premiums from last year. Thenthe government assumes 90% of covered losses up to the program's$100 billion cap. Coverage applies to commercial insurance andworkers comp.

Under both the House and Senate renewal bills, the trigger wouldbe raised to $50 million in 2006 and $100 million in 2007. However,the House bill would expand TRIA to include group health insuranceand acts of domestic terrorism, while the Senate version wouldeliminate coverage for a number of commercial-lines exposures, likecommercial auto, professional liability, and burglary and theft.Essentially, coverage would be scaled back to general liability,property and workers comp exposures. Retentions also would behandled differently under the two bills, although increased ineach. In a significant difference, the Senate bill called for TRIAto terminate at the end of 2007, putting the industry on noticethat it would be on its own after that, while the House bill wasmore open-ended.

As this was written, the betting was on a final bill that wouldlook more like the Senate's version than the House's, which thepresident would then sign into law. Certainly, the biggest disasterwould be to have no extension of TRIA at all. That said, theinsurance industry can count on continued pressure to shoulder moreof the terrorism exposure itself, given today's budget deficits.The fact that the industry so far seems to be handling the enormouslosses of this year's hurricane season likely will be used to arguethat insurers also can manage the terrorism exposure, despite thefact that the two perils have little in common, other thanpotential severity.

While it is understandable that the government will continue totry to limit its role in terrorism insurance, it would beunreasonable for it to say it has no financial responsibility atall. I find myself agreeing with William R. Berkley, chairman andCEO of W.R. Berkley Corp., who in a recent letter published in theWall Street Journal, stated that TRIA must be preserved at leastfor workers compensation and commercial property exposures-in theformer case because insurers currently have no choice under law butto include terrorism coverage in workers comp; in the latterbecause long-term financing of large construction projects, whichis essential to the nation's economic health, hinges on theavailability of terrorism insurance.

Those needs will still be with us at the end of 2007, when anynew TRIA legislation will expire. That will be a problem forprivate insurers, which must be able to predict and pre-fundlosses. The task is hard enough in the case of disasters likehurricanes, but well nigh impossible when it comes to terrorism.Certainly, insurers must continue to try to develop models for thisrisk, but the federal government needs to be realistic about thechances for success-and about the need for ongoing governmentinvolvement in terrorism insurance through 2007 and beyond.

The insurance industry has been united in its call for acontinued federal backstop for the terrorism exposure. Suchunanimity, however, has been absent from efforts to persuade thegovernment to play a role in insuring natural disasters. This isnot a new debate. Legislation that would create such a roleregularly is introduced in Congress. This year's incarnation, theHomeowners' Insurance Availability Act of 2005, was introduced inthe House in March by a couple of Florida congressmen. So far,there's been little action on the bill, which calls for the federalgovernment to reinsure as much as $25 billion in losses.

Following Hurricane Katrina, a "National Catastrophe InsuranceSummit" was convened in California. It ended with a call by someinsurance commissioners for policies that would protect homeownersand renters from natural disasters like hurricanes and earthquakes.The program would include a federal insurance component, althoughthere was no consensus on its scope.
Meanwhile, many insurers are opposed to a federal role, arguingthat it only would make it more difficult for insurers to chargeappropriate rates in high-risk regions. That's a reasonableconcern, given that actuarial studies of state-owned insurancecompanies in coastal areas indicate that their rates should beraised-in some cases by as much as 80%. Also, a lot more needs tobe done to mitigate risks by strengthening building codes andrestricting development in loss-prone areas before shifting morerisk to taxpayers.

In regard to insuring natural disasters, "the biggestcatastrophe would be if the government was to get involved," EdmundKelly, Liberty Mutual's CEO, was quoted as saying at a recentmeeting. I tend to agree.