An organization supported by Allstate Insurance campaigning for a federal catastrophe fund last week fired back at insurer groups that oppose the concept because they believe the private sector remains capable of covering such risks.

David A. Smith, director of ProtectingAmerica.org, singled out the American Insurance Association in particular, calling its criticisms “shortsighted and misinformed.”

The proposal, which would establish a federal catastrophe fund to back up individual state funds, would be implemented under federal legislation, HR 4366, introduced in the House by two Florida Republicans–Reps. Ginny Browne-Waite and Clay Shaw.

Allstate Insurance, which paid more than $3 billion in claims for Hurricanes Katrina and Rita, has backed the proposed catastrophe fund philosophically and financially, with Chief Executive Officer Edward Liddy delivering several talks in which he champions the concept.

“There is simply not enough capital, not enough money in the system,” to handle major catastrophic events such as Hurricanes Katrina and Rita, said Mr. Liddy. “The insurance industry is not built to handle these types of events. We're built, really, as an industry, to deal with events that are much more predictable.”

However, the idea has come under fire from insurer trade groups, including the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America.

The American Insurance Association criticized the proposal for effectively creating a coverage subsidy for those living on the coast that would be borne by those further inland, adding that it would increase prices by forcing insurers to participate even if they already pay for private reinsurance.

“To in any way contend that a privately funded backstop is somehow a 'subsidy' is flat out wrong,” Mr. Smith said in response. “We are supporting a privately funded federal backstop with money coming from the revenues of participating insurance companies. A simple reading of HR 4366 would have shown the AIA that our proposal in no way provides a subsidy to anyone.”

In an earlier speech to reporters in Washington, Mr. Liddy said that by having state pools as the first line of protection, the system would avoid charges of one area subsidizing insurance for another. “We are not suggesting that people in Iowa fund the good life for people living in Florida, South Carolina or Georgia,” he said.

However, Julie Rochman, a senior vice president at AIA, argued that the bill would indeed involve a subsidy, but noted her group's opposition was based more on the notion that HR 4366 would impose a government solution for a risk the private market is capable of covering.

“The private market has worked and can continue to work as long as insurers have the tools” to adequately assess the risks, such as modeling, she said.

Additionally, according to Ms. Rochman, a government-administered pool would increase the risk of taxpayers being forced to cover losses. “In the private market, a reinsurer is supposed to determine how much to charge for a risk,” she said. “If they are wrong, then the reinsurer is responsible for the loss. If a federal program guesses too low, then the taxpayers bear those losses.”

A perfect example of this, she said, can be seen in the National Flood Insurance Program, which has been forced to borrow money over the past few years to cover losses from a series of major hurricanes.

Although the NFIP is required by law to repay what it borrows, Ms. Rochman said that “nobody expects” it will do so for the $20 billion it has needed to cover losses stemming from Hurricanes Katrina and Rita.

ProtectingAmerica.org questioned the motives behind AIA's criticisms, drawing a contrast between the proposal and the recently extended Terrorism Risk Insurance Act, which provides federal support when insured terrorism losses pass a certain point.

“It is interesting that on the one hand, the AIA is in full support of a taxpayer subsidy for terrorism coverage for the commercial insurance market, yet it opposes a privately funded backstop for the homeowners market,” said Mr. Smith. “We think homeowners need protection.”

Ms. Rochman countered that the two are entirely different, in that insurers have tools for gauging catastrophe risk, such as models and loss data, while terrorism remains inherently unpredictable. “After 9/11, the reinsurance market for terrorism risk collapsed,” she said, while on the contrary, “after the hurricanes, $21 billion in capital was added to the market.”

In his earlier speech to reporters, Mr. Liddy explained that TRIA is a “whole different concept” than the program Allstate is supporting for natural disasters, in that the cat fund would be funded prospectively, with states and policyholders paying into the fund rather than having the government recoup losses afterward, as would be done under TRIA.

In addition, he dismissed the idea that private capital is replenishing what's been lost in the hurricane onslaught of the past two years, noting that while new capital has moved into the reinsurance market, it was not nearly enough to cover what has been paid out by insurers–with the hurricane season of 2005 estimated to have caused between $60 billion and $80 billion in damages. “Do the math,” he said.

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Proposed Disaster Fund Sparks War Of Words

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