The Federal Insurance Office is being told the government should support the private reinsurance market and think long and hard before creating any government backstop that would displace the current system.

The feedback comes from the FIO's request for input on a forthcoming study of the breadth and scope of the global reinsurance market, and the critical role such markets play in supporting insurance in the United States.

Eli Lehrer, president of industry think-tank R Street Institute, says any federal reinsurance mechanism that would displace private reinsurance "would have the effect of concentrating risk within the borders of the United States, rather than dispersing it through the global reinsurance market."

"Governments are intrinsically ill-suited to providing property reinsurance," Lehrer further argues in his letter.

In another letter, the Coalition for Competitive Insurance Rates (CCIR) also voices strong opposition to a provision of the Obama administration's proposed 2013 budget that would deny a tax deduction for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers.

Writing on behalf of the CCIR, Dan Kugler, board liaison to the Risk Management Society (RIMS) external affairs committee, said the administration's suggestion is "a harmful and discriminatory proposal."

Legislation supporting a similar proposal has been introduced in the House and Senate.

Ironically, the deadline for input comes as Hurricane Isaac visits Florida—an observation all three commentators to the request for input cite in their opinions.

The FIO is believed to be looking into the issue under pressure from Florida legislators.

Several years ago, Democratic Sen. Bill Nelson and former Republican Sen. Mel Martinez, both from Florida, asked Treasury Secretary Timothy Geithner to provide a federal guarantee should Florida need to raise money in the private market to provide enough money for the state reinsurance programs to pay claims in the event of a strong hurricane.

Geithner wrote back that he had no such authority, but Nelson and Martinez co-sponsored legislation that would accomplish that. The bill was never acted on.

Lehrer also notes the solvency concerns currently plaguing the largest government-run reinsurer in the United States, the Florida Hurricane Catastrophe Fund, whose financial advisors estimate it would face a shortfall of more than $1.7 billion should it have to borrow money in the financial markets following a major storm to make good on its obligations to Florida property insurers.

The Florida Chamber of Commerce tells the FIO that the FHCF, as well as Citizens Property Insurance Corporation, are prime examples of why the federal government should stay out of the reinsurance business.

"While state's lawmakers have taken steps to right-size the FHCF and to reform Citizens and begin returning it back to its intended role as insurer of last-resort, more needs to be done," the Florida Chamber says in its letter signed by David A. Hart, executive vice president.

"The Chamber believes that both entities are underfunded and inappropriately structured, relying on post-event assessments from policyholders statewide to meet their current obligations," Hart adds.

The Chamber letter also criticizes the Obama administration tax proposal.

"Moreover, given the FIO's role in international trade and regulatory agreements, we ask the FIO to consider the potential cross-border impacts of unilateral punitive actions," Hart says.

Special Reports /

Industry Observers to FIO: Support Private Reinsurers

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