Insurance regulators from two coastal states sparred over what the federal government's role should be in solving catastrophe insurance problems, with one saying Uncle Sam should have none until the industry is essentially on life support.

"I don't think we should go to a federal solution until we're on our backs, bleeding to death and breathing our last breath," said Scott Richardson, director of the South Carolina Department of Insurance, during a panel of regulators at the Property-Casualty Insurance Joint Industry Forum.

Mr. Richardson was reacting to a suggestion by Louisiana Insurance Commissioner James Donelon, who proposed a system of private insurance covering all perils, backstopped by the federal government. "A federal fix is the ultimate solution, but it has to be based on the private sector," said Mr. Donelon.

As an example, he said, "I'd get the federal government out of flood insurance and make an all-perils [policy] for earthquake, flood and wind coverage, with a federal backstop in place and/or a federal, tax-free reserving program."

He said tax-free reserving would allow the industry to spread its risk "and provide that coverage for the next 100 years, as you have done for the past 100."

Sandy Praeger, president of the National Association of Insurance Commissioners, who focused on wind-versus-water disputes between carriers and insureds, said she would rather see solutions that would have private insurers take on all perils together with "some method of giving predictability" to them--like payout caps and a reinsurance mechanism--instead of dumping all cat perils into a federal government program.

For Ms. Praeger, the Kansas insurance commissioner, wind-versus-water coverage issues were top-of-mind after a devastating year of catastrophes in her state in 2007, including $150 million in claims related to a May tornado that were promptly paid by private insurers, followed by floods just a few weeks later for which many homeowners were uninsured by either the private market or the National Flood Insurance Program.

However, Mr. Richardson responded, "the federal flood insurance program is the poster child for what not to do," referring to the fact that the NFIP is roughly $20 billion in debt. Given that "they don't enforce their rules [and] flood maps are often wrong," he rejected proposals "to make [NFIP] 20-times bigger by adding wind or earthquake."

Ms. Praeger said adding earthquake to the federal flood insurance program would likely result in earthquake-versus-fire debates that are similar to the wind-versus-water coverage controversies going on now.

Predicting that all-risk policies will not come to fruition, Mr. Richardson would solve wind-versus-water debates with what he referred to as an "indeterminate loss formula." This approach would use sophisticated models together with inputs such as wind speed, tides, depth and distance from water, to segregate wind and water losses rather than searching for watermarks after the fact.

On the issue of letting the federal government into the insurance business, Mr. Richardson warned about the possible snowball effect. "I don't want to be dramatic about it, but once you go down that road" and start letting governmental entities--state or federal--"take over pieces of the industry, most of the time legislators don't know where to stop doing that," he said.

Mr. Richardson--a former insurance agency owner--also worries the U.S. insurance market is "getting more socialistic" while the rest of the world is moving in the free-market direction he embraces. "We're swimming against the tide," he said.

"I want to see the insurance industry take control of the insurance industry," he said. "I think we have walked away from our responsibility to solve some of the problems we have."

Mr. Donelon voiced particular concerns about the possibility an earthquake in San Francisco (where he said only 15 percent of properties are insured against the hazard) would someday do more damage than Hurricane Katrina did in New Orleans.

"They're waiting on the mother of all Road Home programs," he said, referring to a collection of housing programs designed to help residents of Louisiana affected by Hurricane Katrina or Rita get back into their homes quickly and fairly, funded by the U.S. Department of Housing and Urban Development.

"I personally do not think the government ought to get into the business of reinsurance," said Massachusetts Insurance Commissioner Nonnie Burnes. "But I do think there are mechanisms by which the government can give access...to the global reinsurance market," referring loosely to "a facility to backstop the private market."

She said there are bigger questions to address than whether the federal and state governments should take some responsibility in funding catastrophe losses.

"How do we deal with the consequences of catastrophes?" Ms. Burnes asked, citing a recent admonition from catastrophe modeling expert Karen Clark of Boston-based AIR, who warned that a 250-year storm could come tomorrow.

"How do we get ready?" Ms. Burnes asked, expressing the belief that local governments and individuals need to get involved in protection against consequences with mitigation approaches such as roof tie-downs, shutters and better building codes. In Massachusetts, she said the department has talked to insurers about cutting deductibles for individuals who take mitigation steps.

In addition, "we want to talk about ways for the private market to be able to have the capacity to respond," she said, referring to "pooling or funding mechanisms" as a potential approach.

Mr. Richardson said his state has already taken steps to give tax credits and grants to companies and individuals for mitigation activities. "We've got to do something about the exposure," he said. "We can't sit here for another 20 years and let another trillion dollars of construction be built on the coast."

Earlier, Mr. Donelon explained why a state catastrophe fund was not a workable solution to catastrophe insurance availability problems in Louisiana. Private insurers paid out $24 billion in Louisiana alone for Katrina claims, while the Federal Emergency Management Agency paid out another $16 billion for flood claims, he said, contrasting the $40 billion total to $9 billion in state tax revenues generated from all sources each year.

"We can't afford to do anything meaningful in that [state cat fund] arena," he said. "Even our press in Louisiana understands the folly of trying to replicate what Florida did in their special session last year," referring to Florida property insurance reforms that increased the size of the Florida Hurricane Catastrophe Fund.

Instead of going down the cat fund road, Mr. Donelon reported that the Louisiana legislature created a program earlier this year to entice insurers to come into the market by offering economic incentives. The $100 million program was launched on Nov. 1 in an effort to increase private market capacity by 15 percent, according to the Louisiana insurance department Web site.

He said he was scheduled to join Gov. Kathleen Blanco on Jan. 11--her last day in office--in handing out $30 million in incentive checks to a half-dozen "good, strong companies."