NEW YORK (CNN/Money) -
There's a war brewing in the insurance industry.
While executives at big insurers agree that steps are needed to ensure the industry can afford to cover hurricanes and other disasters, they're at odds over whether federal oversight is the way to go.
In the wake of Hurricane Katrina this summer -- which may cost insures up to $60 billion -- some industry representatives have started pushing Congress to create a national system to serve as a backstop for insurers against large losses.
With forecasters predicting that hurricanes will become more frequent and more severe over the next 20 years, proponents say the federal government needs to support the industry in paying out claims to consumers. (Click here for that story.)
And while several executives including Allstate (Research) CEO Edward Liddy have been vocal supporters of a federal system, some others have been critical.
At an industry conference in New York Thursday, Edmund Kelly, chief executive of Boston-based Liberty Mutual, said involving the government would only make it more difficult for insurers to charge the appropriate rates in a high-risk region -- an issue that would ultimately affect profitability and could force companies to leave riskier markets.
"In a national catastrophe, the biggest catastrophe would be if the government was to get involved," Kelly said. "There is plenty of capital for insurers to handle catastrophes but it's the regulatory suppression of prices that's the issue."
The case for a federal pool
Kelly's comments came a day after four state insurance commissioners, speaking at a summit in San Francisco, called on the government to devise a national program in conjunction with private industry to reduce the need for federal emergency aid and make catastrophe insurance available to everyone.
Proponents advocate creation of a pool, essentially a backup insurance fund, that would be paid for with a piece of premiums paid by policyholders.
The model is based partly on the Florida Hurricane Catastrophe Fund – a reinsurance-like entity funded by a portion of premiums and managed by the state. The fund has been credited with helping insurers handle the damage wrought by last year's barrage of four hurricanes as well as Wilma earlier this fall.
But Michael McGavick, former chairman and CEO of Safeco (Research) -- a big property and casualty insures that pulled out of Florida following last year's hurricanes -- said during Thursday's conference that "if the government steps in as the de facto insurer of last resort, you're going to have bizarre economic decisions" that will make it harder for insurers to raise rates significantly if faced with hurricane-related losses going forward.
In an interview, Liberty Mutual's Kelly said he wasn't against state-run catastrophe funds, noting they have helped mitigate insurers' losses. But he said he was concerned that a federal fund could help keep rates for homeowners in coastal areas artificially, and irrationally, low.
Critics see other solutions
Rather than a federal pool, he said, the government should be more active in improving building codes, placing limits on building in high-risk coastal areas and allowing insurers to double the price of homeowners insurance in areas deemed high-risk.
But the national catastrophe fund wouldn't only be relegated to hurricanes.
At the summit in San Francisco, advocates pushed for a broad plan that would encompass risks not typically covered by insurance policies, such as terrorism, which would be funded in part by policyholders.
"One policy, national in scope, will be a more effective and affordable way to provide for those financially harmed by disasters and acts of terrorism," California Insurance Commissioner John Garamendi said in a statement.
But executives speaking at Thursday's conference said it's likely that policy holders in states unaffected by hurricanes or earthquakes would balk at the idea of paying more to subsidize those homeowners that choose to build homes in high-risk, coastal regions.
"Do people really want to subsidize rich people that choose to live on the coast?" said William Berkley, chairman and CEO of W.R. Berkley Corp., a closely help property and casualty insurer. "This is going to be a political hot issue."
Still, executives did say that some action was needed to help keep the industry well capitalized in the face of natural catastrophes.
"We feel that this should be the domain of the private sector," said Stephen Lilienthal, chief executive of CNA Financial. "With cheap government subsidies, common sense departs."
More storms are likely to translate into higher rates. Full story.