The glaring lack of federal flood insurance for thousands of policyholders who lost their homes last year in Hurricane Katrina is one case in point, with critics taking carriers to task for failing to keep buyers properly informed.

While agreeing it's appalling that only 12 percent of homeowners in California have earthquake insurance, while fewer than 20 percent in coastal Mississippi carry flood coverage, he argued that the industry is not guilty of any failure to communicate.

“Awareness is not the issue,” he said. “People in those areas know they need flood and quake coverage, but educational efforts haven't changed behavior. Most people still deliberately, intentionally and knowingly decline the coverage–a fact of life that will likely be the case as long as such insurance is voluntary.”

Suggesting that some employers would not buy workers' compensation coverage, more drivers might pass on auto insurance and many individuals would opt out of Social Security if participation in such programs wasn't mandatory, he said that “unless flood and quake coverage is made compulsory, too many people are still unlikely to buy it.”

However, he added that mandating an all-perils policy that automatically includes flood is not the answer, unless carriers are allowed to charge actuarially-sound rates–a scenario he doesn't believe can be realized politically.

Homeowners coverage without flood is already artificially underpriced in catastrophe-prone areas, he said, because regulators and legislators won't allow insurers to charge what's necessary to adequately cover this potentially massive exposure. The result, he contends, is carriers pulling out of disaster-prone markets and the swelling of residual markets.

Another challenge facing the industry is explaining its record profits in the face of soaring prices and shrinking markets for property coverage in disaster-prone areas.

“To many legislators, industry profitability will seem inconsistent with insurers' push for extension of the Terrorism Risk Insurance Act, and the effort by some insurers to get a national catastrophe plan in place,” he said. “The Institute will leverage its long-standing thought leadership position to explain industry financial performance, and to help put current earnings in the appropriate historical and business context.”

However, Mr. Hartwig added that “the industry is far too cyclical for its own good. Enormous oscillations in price, expansions and contractions in terms and conditions, and the rewriting of entire books of business is often destructive, and subjects the industry to a lot of bad press as insurers are accused of gouging consumers.”

He said “a less volatile industry would not only provide for a more stable business environment, but would ease its communications burden,” adding that “my dream for the industry is one of sustained profitability and relatively stable overall performance.”

This vision is less utopian than you might imagine, according to Mr. Hartwig, who believes industry cycles are becoming less extreme for a number of factors. He observed that:

o “The new breed of insurer CEOs are keenly aware that a big part of their jobs is not allowing their carriers to go over a cliff in pursuit of market share.”

o “Rating agencies are watching them more closely and are quicker to downgrade them if they are caught in a price war.”

o “Investors and Wall Street analysts, while demanding top-line growth, also expect rising profitability.”

o “Improvements in technology allow companies to assess exactly where they are in real time in any given line, geographic area or even by individual producer, making it easier for them to react quickly enough to head off deteriorating situations.”

o “Investment returns aren't as generous or as reliable, prompting more conservative underwriting,” he concluded.