Financial services group backs disaster loan proposal

Group says Congress should allow Treasury to offer a line of credit to state insurance funds following a major crisis.

The Financial Services Roundtable has endorsed a proposal to allow the federal government to offer loans to states to respond to insurance crises after a major catastrophe.

The group said Congress should allow the Treasury Department to offer a line of credit to state insurance funds to respond to a major crisis, such as a hurricane or an earthquake that has triggered a loss where capital is unavailable.

The group did not set a damage threshold to trigger such loans but said it should be under strict criteria, such as the Treasury Department determining the state plan has been operated on a sound actuarial basis; the state adopting and enforcing strong building codes; and allowing insurers to charge risk-based premiums instead of state-mandated caps. The roundtable indicated such loans would be only for large catastrophes or a closely timed series of disasters.

Estimated insured losses from Hurricane Katrina alone were $40.6 billion, according to the Congressional Research Service. "You would have to have a large storm that would threaten viability of a [state] catastrophe fund," said Robert Litan, a senior fellow at the Brookings Institution who worked on the report.

The proposal comes as Congress is exploring ways to provide a federal backstop to coastal insurance markets that have been reeling in the aftermath of hurricane damage from past years. House Financial Services Chairman Barney Frank, D-Mass., has directed two freshman Democrats, Florida Reps. Ron Klein and Tim Mahoney, to develop legislation on the issue.

The Florida Legislature passed a measure earlier this year that creates a state reinsurance fund of up to $32 billion so carriers can continue to operate and also mandates insurance and reinsurance rates at levels critics say are below true underwriting costs.

The roundtable opted not to take a stand on whether the federal government should establish its own backstop for natural disasters to sell to state reinsurance plans because of differences between members, including State Farm Insurance Cos., Prudential Financial Inc., AIG Inc. and others.

Some in the group argued that the threat of damages posed too great a risk for the industry to insure by itself. Others maintained a federal backstop would interfere with the market and that other steps could be taken, such as mitigation and better building codes, to cushion the blow of such disasters.

"They believed that would stop the private market ...We agreed to disagree," said Steve Bartlett, president and CEO of the roundtable. The paper contained 25 major recommendations for policymakers to better prepare for catastrophes ranging from hurricanes, earthquakes and floods to terrorism and pandemics.

Those included authorizing nonbinding arbitration for disputes over whether wind or water damaged a structure and requiring the Federal Emergency Management A to adopt and enforce statewide building codes through its hazard mitigation program.