NEW YORK (CNNMoney.com) -
St. Paul Travelers and its competitor Allstate just can't agree on what the future of the insurance industry will be.
The issue at stake? Policy changes in the federal government that would create a federal insurance backstop to cover large catastrophe losses. Allstate's CEO Edward Liddy has been vocal in his support of a tax-free federal pooling system funded in part by premiums that insurers can dip into in case of another large-scale disaster such as Hurricane Katrina.
But a war has been brewing in the industry with opponents adamantly rejecting any increased regulation or interference by the government. (Click here for that story.)
And now St. Paul Travelers (Research) is the latest insurance company to come out against a federal backstop for insurers.
Speaking at an industry conference in New York, St. Paul Travelers chief executive Jay Fishman said the best way to ensure that the insurance industry has the capacity and capital to fund natural disasters, such as hurricanes, is to stick with a free market approach. Fishman said that government intervention would result in more structure and regulation that would result in inadequate pricing and confusion for tax payers.
"The idea that someone in Oklahoma City would feel comfortable about subsidizing someone that lives on the coast, we don't think that makes sense," he said.
Rather than a federal solution, Fishman said the industry must be allowed to raise rates to a level that matches the expected increase in frequency and severity of hurricane activity in the Atlantic Ocean. He said the company expects a 25 percent to 35 percent increase in hurricane activity and expects more Category 3 or greater events going forward.
He added that the company is reassessing its risk guidelines for any major catastrophic events and is looking to raise deductibles and rates where appropriate. The company is also broadening its definition of what it means to cover a coastal area because "there's more coast than we thought," he said.
Allstate supports federal backstop
Allstate (Research)'s CEO Edward Liddy, also speaking at the conference said the fact that the last hurricane season demonstrated that catastrophic storms can impact geographies beyond traditional coastal areas, is precisely why the industry needs a federal backstop.
Liddy said the approach is two-pronged: states should have a pool funded with a portion of premiums paid by policyholders -- modeled after the reinsurance-like Florida Hurricane Catastrophe Fund as well as a federal backstop that would be broadly funded and would grow on a tax-free basis.
"It's not a tax on everyone," he said. "If the state of Iowa or Missouri doesn't want to participate, its fine. We're not suggesting that people in Iowa pay for people that want to live the good life on the beach."
But he warned that catastrophes can strike anywhere and at anytime. A severe catastrophe could wipe out a state-run pooling system quickly. Without a federal backstop, insurers might be left with greater losses if a state-run pool was depleted. And he believes that although states shouldn't be mandated to participate it would be in their best interests to do so.
In addition to a federal pool, Liddy said stiffer building codes should be enforced and there should be more coordinated planning and better education about catastrophe risk.
Is the insurance sector the next big thing? Click here.
Katrina rebuilding boosts online job ads, go figure.