To what extent should the US government be involved in
insuring catastrophic risks? asks Ernie Csiszar.

Throughout the US, insurers, the business community, citizens, and public policymakers are discussing how the nation can better prepare for, respond to, and recover from natural disasters. Insurers and lawmakers at state and federal levels are attempting to determine the appropriate roles of the private market and the government in an effort to reduce the losses from future catastrophes and to secure the financial resources to ensure an efficient recovery.

The Property Casualty Insurers Association of America is studying this issue thoroughly and, because the action we take will have an impact on where future generations of Americans live, the dangers they may face, and the cost to insurance policyholders and taxpayers, we are proceeding carefully. Some guiding principles we are considering include:

• Insurance markets must be given greater freedom to develop prices and terms for catastrophic risks and that individuals living in the most disaster-prone areas have to assume greater personal responsibility for those risks.

• We need tougher building codes and land use controls.

• The National Flood Insurance Program must be reformed to improve consumer protection, increase participation, and fund programmes to buy-out or eliminate coverage for repetitive losses.

• States with significant catastrophic exposure will have to consider new methods of paying for those risks. Private markets in some states may not be able to respond to all these risks and state catastrophe funds are among the policy tools that should be considered in those states.

• Insurers should be able to establish voluntary, tax-deferred catastrophe reserves, as they can throughout Europe, to accumulate funds for future catastrophes.

• Innovative tools to attract private capital to protect against natural catastrophes should be encouraged. In particular, we should look for ways to remove regulatory and accounting obstacles that may be hindering the further development of a catastrophe bond market.

The progress we make before the start of the 2006 hurricane season and in the future will demonstrate how much we've learned from the catastrophic events of 2004 and 2005. It is imperative that insurers be fully engaged in this debate and in aggressive efforts to develop effective public policy solutions that address the needs of consumers, insurers, and the nation.