WHAT IS the proper role of government in insuring disasters--both natural and man-made? That has been one of 2005's great debates in the insurance business. This year's unprecedented hurricane season has renewed calls for a federal backstop for hurricanes and earthquakes, while the approaching expiration of the Terrorism Risk Insurance Act of 2002 has forced Congress to decide to what degree the government should continue to be an insurer of events 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 will have been extended. Certainly, at the time this was written, the signs were propitious. Both the House and the Senate had approved legislation to renew the program and were expected to meet to iron out differences in the two bills earlier this month. Meanwhile, the White House, despite taking a hard line throughout the year, was said to be interested in reaching a deal that would be popular with business constituents.

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

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

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

While it is understandable that the government will continue to try to limit its role in terrorism insurance, it would be unreasonable for it to say it has no financial responsibility at all. I find myself agreeing with William R. Berkley, chairman and CEO of W.R. Berkley Corp., who in a recent letter published in the Wall Street Journal, stated that TRIA must be preserved at least for workers compensation and commercial property exposures-in the former case because insurers currently have no choice under law but to include terrorism coverage in workers comp; in the latter because long-term financing of large construction projects, which is essential to the nation's economic health, hinges on the availability of terrorism insurance.

Those needs will still be with us at the end of 2007, when any new TRIA legislation will expire. That will be a problem for private insurers, which must be able to predict and pre-fund losses. The task is hard enough in the case of disasters like hurricanes, but well nigh impossible when it comes to terrorism. Certainly, insurers must continue to try to develop models for this risk, but the federal government needs to be realistic about the chances for success-and about the need for ongoing government involvement in terrorism insurance through 2007 and beyond.

The insurance industry has been united in its call for a continued federal backstop for the terrorism exposure. Such unanimity, however, has been absent from efforts to persuade the government to play a role in insuring natural disasters. This is not a new debate. Legislation that would create such a role regularly is introduced in Congress. This year's incarnation, the Homeowners' Insurance Availability Act of 2005, was introduced in the House in March by a couple of Florida congressmen. So far, there's been little action on the bill, which calls for the federal government to reinsure as much as $25 billion in losses.

Following Hurricane Katrina, a "National Catastrophe Insurance Summit" was convened in California. It ended with a call by some insurance commissioners for policies that would protect homeowners and renters from natural disasters like hurricanes and earthquakes. The program would include a federal insurance component, although there was no consensus on its scope.
Meanwhile, many insurers are opposed to a federal role, arguing that it only would make it more difficult for insurers to charge appropriate rates in high-risk regions. That's a reasonable concern, given that actuarial studies of state-owned insurance companies in coastal areas indicate that their rates should be raised-in some cases by as much as 80%. Also, a lot more needs to be done to mitigate risks by strengthening building codes and restricting development in loss-prone areas before shifting more risk to taxpayers.

In regard to insuring natural disasters, "the biggest catastrophe would be if the government was to get involved," Edmund Kelly, Liberty Mutual's CEO, was quoted as saying at a recent meeting. I tend to agree.

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