Insurance industry debates federal role in disaster coverage

Some do not think the government should serve as a backstop.

Insurance industry representatives are at odds over whether Congress should create a federal backstop for disaster coverage in the wake of billions of dollars in property damage caused by hurricanes Katrina and Rita.

Allstate CEO Edward Liddy today said his company is pushing a House bill that would require state and federal backstop initiatives. Heading up the effort in Washington is former Federal Emergency Management Agency Director James Lee Witt, now a lobbyist.

Liddy said Witt is helping Allstate build a coalition of supporters within the insurance, real estate and property developers industries. But he faces an uphill battle garnering support from his colleagues.

"It's not the right time to have a decision about a federal backstop for disaster coverage," said Julie Rochman, senior vice president of public affairs for the American Insurance Association. "We don't think the entire country should be subsidizing people living in coastal areas."

Rochman added that so far only Allstate and State Farm support the House legislation. The AIA, along with numerous insurance organizations, earlier this year won a hard-fought battle to convince Congress to extend a federal backstop for terrorism insurance.

Rochman argued that a federal backstop for terrorism risk differs from disaster coverage, because the private sector can manage disaster coverage with help from state regulations on building codes and coverage flexibility.

But Liddy challenged that argument, saying "there is not enough money in the system to handle these mega-events."

He predicted that insurance companies would vacate states with high-risk areas like Florida and California because experts believe hurricanes are growing more frequent and severe. The scientific evidence, coupled with increasing populations and home values in catastrophe-prone areas, has made the current system inadequate, he argued.

Liddy said the House bill would fund the state and federal backstop programs with money from residents living in high-risk areas. The House bill, which was drafted by Florida lawmakers, would require states to strengthen building codes and regulations.

There is not a similar Senate bill. Liddy also called for a federal regulation board as a regulatory option for insurance companies rather than the current state-by-state oversight structure.