The government and insurance industry must work together to recapture earlier momentum, to forge catastrophe programs that meet the needs of the U.S. public in case of extreme loss, a research firm reported yesterday.

TowerGroup in Needham, Mass, said in a study that urgency to address the issue has flagged with low catastrophe losses the past two years.

The firm said the growing global insurance market presents challenges that range beyond U.S. borders and that complex and frequently conflicting U.S. regulatory requirements hinder economic expansion for many carriers.

It added that insurance innovation and the ability to speedily bring new products to market are stymied by regulations that vary between the 50 states. "There must be an option for carriers to elect a single point of governance," said TowerGroup.

It also called for reforming the four key regulatory items related to catastrophe management and said globalization should be top on the agenda this year.

Industry and government, it said, must look to: reform the National Flood Insurance Program (NFIP); reject a national subsidization of local catastrophe exposure; strengthen the extension of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA); and establish an Optional Federal Charter (OFC).

The NFIP, according to TowerGroup's analysis, must be overhauled immediately. Re-mapping of flood-prone areas, it said, is key to establishing the eligibility of at-risk structures and will take approximately five years to accomplish.

TowerGroup added that NFIP rates must become actuarially sound and enforcement of the requirements that property owners purchase flood insurance must occur.

The research firm also voiced support for moves such as those undertaken by New York and Florida to increase foreign reinsurers' ability to provide coverage.

With many parties aligned against the creation of a national catastrophe fund, involving the voluntary, private international reinsurance market is a sensible response, TowerGroup said.

But, it added that it believes the long-term solution to catastrophe management comes down to insurance fundamentals: risk-based pricing and underwriting integrity.

Expanding the scope of TRIPRA is an economic imperative, not just for carriers but for the U.S. public. TRIPRA must become a more certain backstop by extending the program life for a period longer than seven years as well as expanding protection for weapons of mass destruction, TowerGroup advised.

In an election year, the research firm said, adoption of an OFC is unlikely. However, in order to allow U.S. carriers to compete globally, TowerGroup believes an OFC must be available. If not, carriers that conduct business in countries with less regulatory complexity will win out over those that have operations in the United States, the firm predicted.

Insurance carriers have a significant leadership role to play in this process, according to TowerGroup, which said it believes that in order to be successful, they must be able to manage risk through the use of such leading technologies as predictive modeling, geolocation and risk mapping.

TowerGroup said that while it is "absolutely critical that catastrophe modeling be in place at all carriers, a percent of insurers today still lack this capability or do not apply it on an enterprise level." In addition to adopting technologies for catastrophe management, data integrity and data access are essential, it said.

The TowerGroup research report, "2008 US Insurance Regulatory Agenda: Will the Upcoming Elections Quell the Drive for Reform?" was written by Karen Pauli, a senior analyst in the TowerGroup Insurance practice.

Requests for copies of the research can be made by contacting Rachael Adler at 212-455-8037 or radler@cooperkatz.com.

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