The Risk & Insurance Management Society Inc. has delivered a comment letter to the U.S. Department of the Treasury on the state of the U.S. natural catastrophe insurance market that, among other things, raises the possibility of reducing insurers' reliance on modeling specific properties to assess risk and creating a mechanism to allow insurers to pool a portion of premiums to fund future losses.

The letter delivered Thursday, June 27, from RIMS President John R. Phelps to Michael McRaith, director of the Federal Insurance Office, addresses the volatility of the natural catastrophe insurance marketplace, insurance availability and pricing, the need for a consensus definition of “natural catastrophe,” land use policies and building codes, the current financial condition of state catastrophe funds and current approaches to insuring natural catastrophe risk in the United States.

“For many of our members, natural catastrophe insurance is a major component of their overall risk management portfolio,” wrote Mr. Phelps, who also is director of business risk solutions for Jacksonville, Fla.-based Blue Cross and Blue Shield of Florida Inc.

The destruction caused by natural catastrophes “can be devastating if an entity is not properly covered for these catastrophes,” Mr. Phelps wrote. “Readily available natural catastrophe coverage at affordable rates is critical to the financial stability of an organization, but also to the economy as a whole.”

“One possible way to stabilize natural catastrophe rates would be to rely less on modeling of a specific property to assess risk,” the letter says. While noting that modeling was originally intended to model a large portfolio of risk over a broad area, focusing on specific buildings lessens the reliability of modeling and can lead to higher risk factors and higher rates for that property, the letter said.

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Allowing insurers to aggregate a portion of premiums into a pool to fund future losses “would lead to greater stability in premium rates from year to year as rates charged in low loss years could be rolled over to help hold down rates in higher loss years,” the letter said.

Regarding achieving a consensus definition of “natural catastrophe,” the letter said, “Doing away with carve-outs or exclusions for such things as 'storm surge' would give the consumer a higher sense of security that they are fully covered regardless of whether flood damage is caused by wind or 'rising flood.'”

That might also lead to increased purchases of coverage by consumers “who currently non-insure due to poor perception of the insurance industry or confusion over exactly what is, and is not, covered,” the RIMS letter said.

The letter from RIMS was in request to a Treasury Department solicitation for comment on natural catastrophes and insurance.