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NEW YORK (FORTUNE) -
If you thought your business had a rough fall, consider Ed Liddy, CEO of Allstate, the second-largest property-and-casualty insurer in the United States. The unprecedented hurricane season hit Allstate particularly hard, resulting in a $1.55 billion net loss in its most recent quarter. (The stock is 17 percent off its July high.)
The straight-talking Liddy sat down with FORTUNE's Matthew Boyle to explain why private insurers need to be shielded from catastrophic events, and why for his team, Katrina was the Big Game.
Why do you think state and federal governments should help shoulder the cost of catastrophic events?
Insurance can work well over a long period, but what it can't always do is absorb the extreme shocks. Hurricane Andrew wiped out all the profit we had ever made in homeowners insurance in Florida. The four hurricanes in 2004 wiped out every penny we put into the state from 1992 to 2004. That's not a viable proposition. Above a certain level, you need to have a state fund such as the one that exists in Florida. And then for the extreme events you need a federal government backstop.
Our initiative is called Prepare and Protect America. We think private insurance companies absolutely have to play a role in providing insurance in some of these exposed areas, but above a certain level, you need to have a state fund such as the one that exists in Florida. And then for the extreme events you need a federal government backstop much like TRIA [Terrorism Risk Insurance Act] exists for those situations like 9/11.
How would this program be funded?
You could add something, say $20, to every homeowners' bill in the country. You could also extract money from real estate transactions in the form of transfer fees.
Why not just raise your rates in areas that are subject to big claims?
The regulators won't allow us to. But let's say we could. For 30 years we'd charge you $30,000 a year. We would be obscenely profitable. And then one day a Category 4 hurricane would hit, and we'd give 96 percent of the profit back in 12 hours. I'm not sure the public would allow that kind of policy to exist.
Why get the feds involved?
The federal government is going to get involved anyway. My feeling is, why not be involved in a rational way instead of everyone being in helter-skelter mode after a substantial event?
What happens if Washington says no?
There's not going to be insurance available.
Not any affordable insurance, or not any insurance period?
Not any, period. Already, we are not taking on any new homeowners' risks anywhere in the state of Florida. We're not alone. Safeco pulled out, and State Farm is not taking on homeowners in southern parts of the state.
Where else are you pulling out?
We aren't going to do any new business in Mississippi because the Attorney General wants us to cover floods. We are not writing any new homeowners policies along the Louisiana coast, and we are cutting back in some parts of Texas. It's painful for us to do it and we get black eye for it but the private insurance market can't afford to be exposed to these kinds of losses. Our premiums in the Gulf Coast states of Louisiana, Mississippi and Alabama are a $1.3 billion a year. Our losses from Katrina alone were $3.7 billion.
Legislative solutions are measured in years, not days. How will you speed things up?
The state insurance commissioner of California, John Garamendi, is holding a symposium in the middle of November and he's going to be joined by the commissioners of New York and Florida and a couple of business types like me who can put together the framework of a national solution. To the extent that the states ask for it, it's going to have a much different level of traction than if it's just insurers asking for it.
What portion of Katrina and Rita claims have you processed so far?
For autos, we are 50 percent to 60 percent done. For homeowners, leaving New Orleans out, we're 20 percent to 25 percent done. We expect over 300,000 claims from Katrina and Rita. So far we've closed about 50,000.
What does it take to get that done?
Our claims organization has 18,000 people. We had 1,500 stationed along the Gulf Coast before Katrina hit. We have taken that number up to 4,000. Our people are working ten hours a day, ten days on and four days off. For our claims employees, it's the Super Bowl.
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