NEW YORK--A Travelers executive speaking at a rating agency conference last week said his company's proposal to deal with insurance issues arising after natural catastrophes now embraces the concept of a federal reinsurance program.
Distinguishing the concept of reinsurance from proposals for a federal backstop, Eric Nelson, vice president of risk management for Travelers Personal Insurance and Small Business in Hartford, said under the Travelers concept insurers would pay the premium for reinsurance coverage of extreme catastrophic events.
The reinsurance feature is a departure from a plan outlined by Travelers Chief Executive Officer Jay Fishman in an Aug. 27, 2007 opinion piece published in the Wall Street Journal, which like the plan Mr. Nelson described last week, also includes a limited role for the federal government in regulating insurance rates and an emphasis on loss mitigation.
Mr. Nelson discussed Travelers' revised proposal at the Standard & Poor's annual insurance meeting last Monday in New York during the session titled, "Is A Federal Catastrophe Backstop Necessary or Desirable?"
Also speaking at the conference was Edward Collins, managing counsel for Allstate, who is also national director of ProtectingAmerica.org., which is lobbying for a system of federal and state backstops to help home insurers with major catastrophes.
With him were Stephen Weinstein, senior vice president and general counsel for Bermuda-based RenaissanceRe Holdings, and Howard Mills, chief advisor for the Insurance Industry Group of Deloitte & Touche U.S.A.
Referring to the proposal being promoted by ProtectingAmerica.org, Mr. Collins tried to dispel the notion that the ProtectingAmerica is only about government solutions.
"This program is about the private market," Mr. Collins insisted. "It does not eliminate private reinsurance. It adds capacity," he said.
Mr. Collins also said that while "people that live on the beach need to pay all the costs associated with living on the beach,...they don't have to be exposed to the skyrocketing escalating [insurance] costs that we see after events."
Mr. Nelson said the federal reinsurance mechanism of Travelers' proposal attacks the affordability issue. He explained that most carriers don't purchase reinsurance for really extreme tail events--for hurricanes with losses that are multiples of Hurricane Katrina's losses, suggesting that having reinsurance available from the federal government would stabilize the market.
Insurers would give up a portion of profits to pay premiums to the federal government, which would be based on the loss costs and the expenses, he said, adding that unlike private reinsurers, the federal government wouldn't require a profit provision in the premium.
Travelers' proposal also calls for the creation of four zones--the Gulf, Florida, Southeast, and Northeast--with the federal government providing rate and underwriting regulation within these zones.
"The basic tenet of insurance is really looking at homogeneous risks," he said, explaining that the need for the federal government to create a more stable regulatory environment across states lines in areas where hurricane risks are similar.
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