Coming to grips with mega-catastrophe risks is at the top of theinsurance agenda for state lawmakers and regulators in 2006 in thewake of back-to-back years of massive hurricane losses.

Commissioners from two of the most catastrophe-pronestates–California and Florida–kicked off a national debate inNovember with a controversial proposal that would require propertyinsurers to cover all natural risks, including flood, in return fora state and federal backstop in the event of mega-losses.

Regulators and industry representatives both took a wait-and-seeattitude at the National Association of Insurance Commissionerswinter meeting last month.

The newly-installed NAIC president, Maine Insurance CommissionerAlessandro Iuppa, said the plan is worth looking into, but would gono further than that. “We at the NAIC are the technical experts, sowe have a role there, and the topic is certainly timely,” hesaid.

Florida Insurance Commissioner Kevin McCarty said he hopes forsome NAIC action at the group's next meeting in March.

Mega-catastrophe risk coverage is a multifaceted issue with botheconomic and political components, according to Joseph Annotti,senior vice president at the Property Casualty Insurers Associationof America. “We are currently determining a policy position on thisissue, and when consensus is achieved, we will advocateaggressively for our members,” he said.

However, with strong public positions on opposite ends of thespectrum taken by two of PCI's leading members–Allstate and LibertyMutual–reaching that consensus will be a challenge.

Meanwhile, the American Insurance Association has come downfirmly against the plan–particularly its proposed governmentbackstops. “We will be advocating that policymakers establish ormaintain proper incentives for private-market insuranceparticipation in catastrophe-prone states, including mitigationimprovement,” said an AIA representative, Brenda O'Connor.

In Florida, the AIA will work to strengthen both the statecatastrophe fund and the high-risk exposures faced by the state'sresidual market, Citizens Property Insurance Corp., Ms. O'Connoradded.

If insurers do take on flood risk, it will involve a majorrevamping of the National Flood Insurance Program. That new burdencould also be propelled by the “wind versus water” lawsuitschallenging the industry's longstanding flood exclusion, which Mr.Annotti said are adding a new dimension to the debate. (See relatedstory on page 12.)

“We would like to see the NFIP be required to operate in a morefiscally responsible manner, and one that discourages continuedconstruction in areas susceptible to repeated catastrophicflooding,” said Mr. Annotti.

Susan Nolan, executive director of the National Conference ofInsurance Legislators, said her organization will look into backinga private-public approach to natural catastrophe risk. “Legislatorswill also pursue state enactment and enforcement of effectivebuilding codes in order to reduce catastrophic losses and lowerpolicyholder premiums,” she noted.

In addition to his NAIC role, Mr. Iuppa also serves in a similarcapacity at the International Association of Insurance Supervisors.As such, he can keep a close eye on new global accounting andsolvency standards that in the end might become part of the U.S.canon. The amount of progress in those two areas could determinewhether the NAIC decides to tackle the thorny issue of alienreinsurer collateralization.

Mr. Iuppa said the question of lowering the current 100 percentcollateral requirements will top the agenda at the commissioners'organizational meeting in February. The NAIC recently approved awhite paper setting the terms of the debate, which went on atwo-year hiatus while the main antagonists–the alien reinsurers andthe domestic insurance industry–attempted unsuccessfully to reach acompromise solution.

Nationalization of insurance regulations will continue to occupythe energies of regulators, lawmakers and insurers this year. Themain stage will be in Washington, where House members will look atfederal preemption legislation known as the State Modernization andRegulatory Transparency (SMART) Act, which would set federalstandards for state insurance regulation.

However, there should be plenty of action in the statehouses,particularly in Massachusetts, where lawmakers are attempting tomodify the “fix and establish” rating system for personal lines.“Massachusetts will be a key battleground as insurers attempt tointroduce a more competitive system to a state whose auto insuranceratings practices closely resemble that of the old Soviet Union,”according to Mr. Annotti of PCI.

Ms. O'Connor said AIA will continue pressing for further reformsto New York's no-fault system in 2006, as well as reauthorizationof the state's flex-rating plans. “In other states we will work tosupport the sunset of Florida's no-fault law and a transition to atort system, and continue efforts to manage Colorado's similar 2003transition to a tort system from no-fault,” he said.

Producers will have their own agenda in 2006. Wes Bissett,senior vice president of the Independent Insurance Agents andBrokers of America, said meaningful licensing reform remains at thetop of his group's agenda. “One of our key objectives is to addressrequirements in many states that force an agent to obtain threelicenses–individual, entity and corporate registration–before anybusiness can be written in a particular jurisdiction,” henoted.

The IIABA will continue to oppose the NAIC fingerprintrepository project. “If they go ahead with it, it is likely thatsome states will consider legislation that would prohibit insurancedepartments from sharing fingerprints with entities like the NAIC,”Mr. Bissett said.

For the Council of Insurance Agents and Brokers, building onthis year's success in “clearing the table of awful protectioniststate countersignature statues” will keep the group's governmentaffairs representatives occupied. “Our next priority is using thesame legal theory–eliminating obvious barriers to free and opencompetition–and apply it against the morass of state surplus lineslaws,” noted Joel Wood, CIAB's senior vice president for governmentaffairs.

Looking to create a permanent coverage solution for terrorismexposures that includes some federal intervention to create amarket for the controversial risk will also remain a toppriority–and a fairly daunting one at that, CIAB noted.

“Having just gone through the bruising and ugly TRIA extensiondebate, nobody in Congress really wants to hear from us on thatissue for the time being, and I'd sort of not like to have to thinkabout it myself,” Mr. Wood said.