David Snyder, assistant general counsel of the American Insurance Association, said that while initial discussions of some sort of federal backstop for natural catastrophe losses could be valuable, the current proposal goes too far, too fast. "What we have here is one company and two states looking to nationalize their catastrophe costs," he said. "While I can respect their motives, I don't think we should wreak havoc with the present system that has worked well for many years."

Other p-c associations took more equivocal stands, raising a number of questions about the plan's main components.

Last month, the insurance commissioners of California and Florida–John Garamendi and Kevin McCarty, respectively–sponsored a national catastrophe insurance summit that called for a private-state-federal partnership to fund mega-catastrophe losses, along with a new all-perils homeowners' policy to cover flood claims. The program was detailed here during an NAIC Catastrophe Insurance Working Group public hearing.

For the past several weeks, Allstate has engaged in a major public relations effort to create support for the state and federal funds called for in the proposal. "Allstate just doesn't want to have another bad year," said one industry lobbyist. "But that is the business they are in." The Northbrook, Ill.-based company suffered more than $3 billion in third-quarter losses, and since that time has said it will greatly increase its reinsurance coverage.

The so-called all-perils policy–which would have private insurers cover flood losses for the first time in decades–presents the most serious stumbling block at this point to widespread acceptance, if initial reactions at the NAIC meeting are any indication. At the Dec. 3 public hearing, Mr. McCarty acknowledged that some perils could be excluded–such as mold and vermin–but he remained confident flood could be included, although it would involve a major revamping of the current National Flood Insurance Program.

However, even Allstate representative Jim McCabe said flood losses should be excluded at this point in the discussions.

Mr. McCarty said he hoped to refine the proposal for a meeting in February of the catastrophe insurance working group, where it could be approved for possible final adoption at the March NAIC meeting.

Incoming NAIC President and Maine Commissioner Al Iuppa remained non-committal, other than asserting the time was ripe for a serious discussion of the issue, which he said would take place next year.

One commissioner who has made no bones about supporting such an all-perils policy is Mississippi Attorney General George Dale. His change of heart came as a result of the daily post-Katrina desperate phone calls to his department from homeowners without flood insurance whose houses were destroyed.

Mr. Dale recalled a particularly heart-wrenching case of a 72-year-old man whose home was worth nearly six figures, but who got only a $6,000 check from the insurance company for the percentage caused by wind damage. "They think I am supposed to make these insurance companies pay, but what can I do?" said Mr. Dale, who filed suit challenging the flood exclusion for Katrina.

The two main issues have come down to flood coverage and the dollar loss figures that would trigger state and federal involvement in funding catastrophe losses.

Mr. McCarty said the current shortcomings of federal flood coverage necessitate some sort of radical overhaul of the nearly 40-year-old program. He said the estimated 50-to-60 percent of those who lost their homes in Hurricane Katrina and did not have flood coverage underscores the scope of the problem.

Other knocks against federal flood coverage include the complaint it is not a risk-based insurance program, but more like a federal subsidy that does not encourage sound land use policy in flood zones.

Julie Gackenbach, Washington lobbyist for the Property-Casualty Insurers Association of America, said she believed state regulators could play an important role in overhauling the flood program to meet their concerns, and Mr. McCarty said a scaled-down NFIP could remain in place to cover the most flood-prone areas.

Mr. Snyder joined other industry observers in criticizing the process that led to a proposal of such radical proportions. "This first came to light just last month at an invitation-only, NAIC-partially-sponsored summit, and then they held a public hearing…with very little notice, with the final proposal only delivered days before."

The one-in-50-year event trigger strikes most observers as too low to involve government funding, as disasters at that level have been adequately handled so far by the private market. Mr. McCarty said that figure was just a starting point, which had been used in previous federal legislative funding proposals over the past decade.

The full NAIC passed a resolution on Dec. 4 calling for an exploration of programs to deal with national catastrophes. While Mr. McCarty insisted the resolution merely restated longstanding NAIC policy, Mr. Snyder expressed concern there were enough "buzzwords" to give the impression the commissioners were lining up behind the controversial proposal.

The issue has also presented some unique challenges to PCI, now in its third year of a merger combining the National Association of Independent Insurers and the Alliance of American Insurers.

While Allstate is leading the charge for the public-private partnership, Liberty Mutual has joined with the AIA in signing a letter flatly stating the free market can handle natural catastrophe risk quite adequately for the time being. Allstate played a leading role in the old NAII, while Liberty played the same role in the Alliance.

"We have over a thousand members with varying degrees of opinions on this issue," said PCI's senior vice president, Robert Zeman. PCI President Ernst Csiszar–who was NAIC president when he assumed his new PCI post last year–has remained circumspect when it comes to the proposal, but does not minimize the challenges ahead.

"On the political front, there has historically been very little support from legislators in less disaster-prone states for federal involvement in federal disaster program insurance," he said.

Mr. Garamendi and Mr. McCarty planned the catastrophe summit long before the onset of Katrina, but ultimately it will be the aftermath of that seminal event that will play a key role in its success or failure.

While Mr. Hood's suit to force insurers to cover flood losses is tied up in jurisdictional disputes, it has the potential to rewrite the way the industry covers catastrophic loss with the stroke of a pen–particularly with so many homeowners left in the lurch, threatening the area's recovery.

The two commissioners will have to make the case that the taxpayer/homeowner of Anywhere, USA, will end up funding catastrophe losses on a national basis, whether through after-the-fact federal relief and a subsidized flood insurance program, or built into their insurance rates with some government backing.

However, the insurance industry will remain a hard sell until it can be convinced insurers will be allowed to charge the premiums reflected in the new risk, insurer officials say.

Meanwhile, the difficulty in getting Congress to extend the Terrorism Risk Insurance Act indicates that approving a similar mechanism for natural catastrophe risk will not be a walk in the park, industry observers contend.

Callout: (could use shot of Csiszar)

"On the political front, there has historically been very little support from legislators in less disaster-prone states for federal involvement in federal disaster program insurance."

PCI President Ernst Csiszar

Caption for disaster shot:

Regulators did not reject a proposal for a private-state-federal partnership to fund mega-catastrophe losses, along with a new all-perils homeowners' policy.