To comply with such a drastic change, Mr. Richardson said an insurer might do one of three things–sell stock, raise premium or get off some risk. “That really puts a huge amount of pressure on us, when companies come to regulators and say they have to have more rate,” he commented.

Mr. Richardson said he recalled one situation where a company, using a modeling firm's short-term model, created the need for a 385 percent rate increase, while a longer-term model called for an 85 percent rate increase. “Being the good regulator that I am, we gave them 30 [percent] and they whined all the way out the door,” he said.

“Who knows what's really enough? I don't care what the modelers say,” or how sophisticated their methods are, it's still a wild guess, he added.

Turning to address the investment professionals in particular, he noted that while his constituents–the buyers of insurance–may be less sophisticated than their investor customers, securities professionals still need to give policyholders more than just a passing thought.

“Don't ever forget that Bubba needs to understand how all this works,” he said, referring to a typical South Carolina policyholder, adding that if something “doesn't pass the smell test” for a typical policyholder, then “the simple guy is more than willing to tar and feather everyone in this room. How do they do that? They vote people into office that will vote for more federal [and] state regulation.”

Earlier in his speech, Mr. Richardson commented on regulatory proposals such as an optional federal charter, warning that some large personal lines insurers supporting the concept probably see this as a means of “regulation arbitrage.”

In other words, he said, they are going to run to the federal government if they want to do something they think will work everywhere, and they'll run to South Carolina if they have something they think they'd be better off letting state regulators handle. “They're going to try to play both sides,” he said.

But within three-to-five years, the OFC supporters may be faced with a different situation, he predicted. “Congress will meet one day and say these guys [homeowners insurers] should have to sell [coverage] X. It's going to turn [out] that the federal government will be mandating insurance products.”

He said that with OFC–which he referred to as “Optional Federal Meddling”–federal regulators might try to totally reinvent the state system, but ultimately “you could have 200,000 federal employees doing the same thing everybody's doing right now, [just] much more slowly.”

Within the state regulatory system, Mr. Richardson said inefficient licensing standards and reinsurance collateral issues need to be dealt with, expressing optimism that regulators can find solutions. “When we [the regulators] have to, we can get in there and get it done,” he said, noting that 48 states licensed Berkshire Hathaway in 90 days to write bond insurance. “That's the model that we have to follow.”

Asked about the concept of setting up state and federal catastrophe funds, Mr. Richardson–an advocate of allowing the free market to work–gave examples of how the market has functioned in South Carolina over the last 18 months.

He said even while news continues to be reported about companies leaving Florida, in South Carolina two companies have come in to write high-value, ocean-oriented dwellings with wind, one is writing 50-year-old-plus dwellings with wind, and reinsurers and others are coming in behind them. “The market is working,” he said.

As for the topic of the day–insurance securitizations–Mr. Richardson said he believes the future of the industry is bright. In South Carolina, some $15-to-$18 billion of insurance-linked securities have been issued on the life side of the insurance business, where the state allows the creation of special-purpose financial captives to fund special life insurance reserves.

Right now, the market is frozen for any type of securities, he said, suggesting that investors spooked by what he referred to as the “Bear Stearns” factor and other consequences of the credit market meltdown are viewing 1.75 percent returns on money-market funds as better options than any securities where they might risk losing 10- or 20 percent.

But when investors pull out of their current state of “paralysis,” he said they'll start to look at the analysis and regulation behind insurance securitizations favorably compared to other securities.

There will be huge demand, he predicted. “I think you better be prepared to get your engines humming,” he told those responsible for structuring and selling cat bonds and other insurance-based securities.