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Hopes rise for passage of federal charter bill

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Hopes rise for passage of federal charter bill

WASHINGTON—Proponents of allowing insurers to seek optional federal charters hope that heightened congressional interest in natural catastrophe policy will bolster their cause.

As the height of the hurricane season approached before Congress left for its August recess, lawmakers dealt with several natural catastrophe-related matters, including the House Financial Services Committee's vote to expand the National Flood Insurance Program to cover wind risks. On the other side of Capitol Hill, the Senate Banking, Housing and Urban Affairs Committee gave its blessing to a bill that would create a national commission to deal with insurance and risk management issues associated with natural catastrophes.

Advocates of letting insurers choose to be regulated by federal rather than state authorities welcome the new attention, if not the particulars of all the legislation. OFC backers say that removing insurers from the restrictions imposed by state regulators could mean a greater willingness on the part of underwriters to cover property in catastrophe-exposed areas, resulting in more competition and choice for consumers.

OFC backers agree, though, that allowing insurers to choose federal rather than state regulation will not solve all of the problems associated with insuring catastrophe-exposed property.

The heightened interest in natural catastrophe policy is a "net plus" for proponents of the optional federal charter, said Joel Wood, senior vp for the Council of Insurance Agents & Brokers in Washington. Still, "backers of the OFC have to be judicious in connecting those dots. There is no magic wand for problems associated with the vulnerability of coastal areas and the consequences of zoning laws," he said.

"Nonetheless, the fact that the anachronistic state-by-state rating system impedes the ability of insurers to create national underwriting pools—and while not over-hyping the potential impact—it's clear that a free pricing regime will inevitably lead to opportunities in coastal areas from insurers who feel they can't play in a particular marketplace because of the restraints of state borders," Mr. Wood said.

The increased congressional attention to natural catastrophe issues could have a small but nonetheless significant impact on efforts to create an OFC, said Eli Lehrer, a senior fellow at the Competitive Enterprise Institute, a free market-oriented Washington think tank. And that would be good news for consumers "if we implement the OFC," he said. Of course, "it's not going to solve the problem—no single action will," he added.

But creating an OFC would encourage competition and "in the long-term is likely to result" in lower prices for policyholders. "Obviously, there will not be below-market prices," he added.

"I think that anything that increases focus on insurance" will increase interest in the OFC, said Mr. Lehrer

"I would actually predict that OFC will pass the House in the 111th Congress," which will convene in 2009, Mr. Lehrer said. "The Senate is little iffier."

Another OFC advocate said he has not "seen a definite causal link yet established" between the new congressional focus on catastrophe policy and the OFC. But the American Insurance Assn. thinks it is "logical and inescapable" that the OFC would be a reasonable response to the problems of providing adequate coverage in coastal areas, said Marc Racicot, president of Washington-based AIA.

The OFC would bring capacity to the marketplace and remove politics from ratemaking, he said.

"You end up with a regulatory regime we believe that would allow insurers to tailor coverage to actual needs on the ground," Mr. Racicot said. "We think there are a lot of advantages and common sense imperatives for it to be related and linked" to the issue of catastrophe insurance.

An OFC opponent, however, dismissed any linkage.

"I don't think there's a correlation between the federal government assisting homeowners in disaster-prone areas to eventually leading to federal oversight of the regulatory system," said Justin Roth, senior director-federal affairs in the Washington office of National Assn. of Mutual Insurance Cos.

"There are plenty of examples of where the federal government has stepped in, such as crop insurance, flood insurance and TRIA, and none of them led to a federal takeover of the regulatory system," he said. TRIA—the Terrorism Risk Insurance Act—established the federal terrorism insurance backstop in 2002.

"A lot of the problems that are occurring are happening in several coastal states and I don't think the majority of the members of Congress would view a federal solution as being the answer to a regional problem," said Mr. Roth.