Washington - "The considerable size and cost of catastrophes present unique challenges to participants in the insurance market. Namely, it makes management of potential liability by any single insurance company nearly impossible. In some cases, even the assets of the entire insurance industry are inadequate to reduce potential liability to commercially acceptable level." This statement comes from "An Analysis of Catastrophic Risk Insurance Proposals," a report published by The Council of Insurance Agents & Brokers, produced by Georgetown Economic Services LLC and financed by the Foundation for Agency Management Excellence (FAME)—all based in Washington. The report analyzes the various legislative proposals have been advanced to deal with the problem of insuring catastrophic risk, from natural disasters to acts of terrorism. 

In reviewing various proposals to cover risk relating to natural or man-made catastrophes, the report focuses on approaches to deal with natural disasters: H.R. 4366, the Homeowners' Insurance Protection Act of 2005; H.R. 846, the Homeowners' Insurance Availability Act of 2005 (HIAA); and tax-deductible reserves.

In addition, the authors looked at both the Terrorism Risk Insurance Act of 2002 (TRIA) and the extension of TRIA that was passed in 2005. That law, which provides a federal backstop for the commercial insurance industry in the event of a terrorist attack, will expire at the end of 2007 unless it is extended again.

The study presents arguments advanced by advocates and critics of each of the proposals and assesses each in terms of potential effectiveness, analyzing the options but not endorsing any of the potential approaches.

The study comes as Congress is actively considering a number of proposals to deal with catastrophe insurance and other insurance-related issues. The House Financial Services Committee is holding a hearing on Feb. 28, 2007, to look into the insurance industry's handling of claims from Hurricane Katrina, and a number of lawmakers have raised concerns about the private insurance industry's claims-paying performance in the aftermath of the Gulf Coast storm.

"This FAME study comes at an opportune time. We hope this document, which dispassionately addresses a number of public policy issues involved in catastrophe and terrorism risk insurance, will make a constructive contribution to the debate," says Fred de Grosz, co-chairman of ABD Insurance & Financial Services of Redwood City, Calif., and chairman of the FAME Board of Directors.

One of the issues examined in the report is the difference between the insurance market for natural disasters and the availability of coverage for man-made disasters such as the Sept. 11, 2001, terrorist attacks. Before Sept. 11, the authors noted, terrorism coverage was routinely included in catastrophic risk policies, but now, that coverage is usually excluded.

"Broadly, catastrophic risk is distinct from other insurance risks because of potentially high liability for insurance companies. Catastrophes, whether natural or man-made, affect many persons and firms simultaneously, resulting in potentially huge losses," the report says.

Source: The Council of Insurance Agents & Brokers

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