Creation of a Federal Cat Fund Hits Mainstream

The devastation left by Hurricane Katrina stirred up familiar talk in the insurance industry and beyond about the need for a federal catastrophe risk program. And less than a month after Katrina, insurance regulators from the nation’s largest states announced plans for a national summit in order to develop the country’s first National Catastrophe Insurance Program.

The summit, organized by California Insurance Commissioner John Garamendi, Florida’s Commissioner of the Office of Insurance Regulation Kevin M. McCarty and New York’s Superintendent of Insurance Howard Mills, will be held on Nov. 15 and 16 in San Francisco.

The concept of a national catastrophe risk program is nothing new, says Ernst Csiszar, president of the Property Casualty Insurers Association of America.

“There have been over the years a number of proposals issued ranging from a federally sponsored reinsurance type of program, to an outright catastrophe fund,” Csiszar said.

Organizers of the November summit hope to design a national program that would more effectively spread insurance risk, while assisting survivors with the financial damage caused by natural catastrophes and acts of terrorism. The event, already being planned before Hurricane Katrina struck the Gulf Coast, will focus on devising a “single methodology for risk sharing” in the wake of natural disasters and terrorism. Support is being provided by the Director of the Illinois Division of Insurance, Michael McRaith, and the National Association of Insurance Commissioners’ Catastrophe Working Group.

Several state insurance commissioners and representatives from the insurance industry, Congress, state legislatures and public policy groups are expected to join the effort.

The issue is not at all unfamiliar to Floridians who have been pressing for the development of a national catastrophe fund for years. Since Hurricane Andrew hit Florida in 1992, the state of Florida and its insurers have been pushing discussions of public-private partnerships for a federal program.

“I think what all of us are seeing and why we are all prepared to readdress this issue to see where we can come to some consensus is because catastrophes are getting bigger and bigger and are becoming more frequent,” Csiszar said.

Hurricane Katrina is expected to be the largest natural catastrophe the insurance industry has seen, with estimated insurance losses as much as $60 billion and a total economic loss of more than $100 billion.

“Between the threat of terrorism and the recent Katrina event, I think you’ve got an accumulation of forces that perhaps weren’t present in the past,” Csiszar explained. “There are a lot of people both within the industry and outside, that say there is just no way that the private market alone can handle this, and that there really needs to be a private-public partnership.”

Csiszar told the Insurance Journal that there’s no way to know exactly what such a federal catastrophe program will look like at this point, but that “it has to proceed.”

“We saw what happened in New Orleans, and we just were not ready for it. Not just from an emergency standpoint, but just not ready for the enormous numbers that are coming out of it.

“What is needed, and what we will see, is a trashing out of what the options are and what this might look like,” he added. “One could see high layers of federal pool, but maybe with co-pays, or there may be bonding capacity that’s available. There’s any number of ways in which it could be structured.”

Csiszar said one thing is certain, catastrophe pools are inevitably in the forecast.

“Even if you might not see the impetus or the political willpower to deal with it (national cat fund) at the federal level, you’ll see more activity on the formation of state cat pools particularly in the affected states,” Csiszar said.

Currently, some states, such as California and Florida, have insurance pools to deal with catastrophes particular to their region, earthquakes and hurricanes. But few states have such pools, and as a result most have no affordable way to protect themselves financially if catastrophe strikes. A national policy would help insure more people by lowering costs through greater risk sharing, Garamendi said in a statement.

Independent agent associations have also jumped into the discussions.

“The widespread devastation caused by Hurricane Katrina serves as an awesome reminder that neither one state nor a regional grouping of states can fund or support a catastrophe reserve fund,” said PIA National Senior Vice President Patricia A. Borowski in a statement. “A national program for natural disasters has been discussed for many years. The time to create one is now.”