The federal government should become the insurer of last resort for mega-catastrophes, said a Brookings Institution policy brief published yesterday.

Senior Brookings fellow Robert Litan said in the brief that catastrophic events like Hurricane Katrina incur costs so large and unpredictable that private insurers either are unwilling to insure against them, or charge premiums so high that significant numbers of customers do not want or cannot afford the insurance.

“Without policy solutions, federal taxpayers in particular face unnecessarily large burden for future disaster relief,” Mr. Litan wrote.

Mr. Litan wrote that the federal government should establish an independent office, much like the Comptroller of Currency, but related to the Treasury Department for operating a catastrophic reinsurance program.

The program would charge reinsurance premium to primary insurers and state catastrophe insurance funds. Such actuarially sound rates would give credit to states that have effective building codes and zoning measures aimed mitigating catastrophic risk.

According to the brief, the proposed program would preclude the need for some disaster relief and provide an incentive for governments to develop mitigation programs.

Mr. Litan played a key role, along with Allstate, in the National Catastrophe Insurance Summit in November in which the insurance commissioners of disaster-prone Florida and California help get off the ground.

Allstate has also been in the forefront of pushing for such a federal role, particularly after the nearly $3 billion loss it suffered in the Katrina-impacted third quarter of last year.

From that summit, came a proposal much like the one put forth by Mr. Litan to have the federal government play a critical role in backing mega-catastrophe risk of insurers.

The proposal has been met with opposition or neutrality from the insurance industry and faces its first test at the National Association of Insurance Commissioners meeting next week.

Special Reports /

New Study Backs Fed Cat Role

Related Stories

Recommended For You