In an unprecedented move, the Risk & Insurance Management Society Inc. is proposing the establishment of a federal corporation to provide reinsurance capacity for hard-to-place risks

Outgoing RIMS President P. Richard Hackenburg is scheduled to formally introduce the proposal Tuesday when he testifies before the House Sub-committee on Commerce, Transportation and Tourism.

Mr. Hackenburg said last week that although the federal government cannot provide a “panacea” for insurance buyers, it can play “a significant role” in helping RIMS’ 3,800 members find coverage.

Under the proposal, each state insurance commissioner would be able to authorize commercial insurers and reinsurers to seek excess-of-loss reinsurance from the federal corporation for specific lines. To be eligible for coverage, the insurer must participate in a joint underwriting association or a market assistance plan for the line to be reinsured by the corporation, the proposal says.

The corporation would be able to deny coverage to an underwriter if it decides the risk is unsound.

The proposal, unveiled at last week’s RIMS conference in Toronto, does not specify what lines of coverage the corporation would write.

According to the proposal, primary insurance companies eligible for the federal reinsurance program could purchase limits of up to 150% of their “gross retentions,” while reinsurers could purchase limits equal to 300% of their gross retentions.

Gross retention is defined in a draft of the proposal as “the sum of a company’s catastrophe retention and the catastrophe reinsurance the company obtains from sources other than the corporation.”

The coverage written by the corporation would attach when a reinsured company’s ultimate net loss for a line exceeds the greater of its gross retention or 25% of its policyholder surplus as reported in its most recent annual convention statement.

The corporation would be run by a board of directors consisting of five federal employees and four insurance industry representatives appointed by the president and confirmed by the Senate.

After 15 years, the board of directors would be required to report to Congress on means to transfer the corporation to private control.

The proposal is scheduled to be made before the House subcommittee in response to a request by the panel’s chairman, Rep. James Florio, D-N.J., for alternatives to traditional insurance, said Jon Harkavy, director of governmental affairs for RIMS.

The proposal, which Mr. Harkavy called “bare bones” and “conceptual,” marks the first time that RIMS has proposed direct federal intervention in the commercial insurance market, RIMS officials say.

Mr. Harkavy said if he had been asked three or four years ago whether RIMS would ever suggest such federal intervention, he would have said, “No, we have to save the system.”

Now, however, the unaffordability and unavailability of some lines of commercial insurance is such that “we’d like to give the industry a kick in the seat of the pants,” he said.

The above article was first published in the April 21, 1986, edition of Business Insurance. To access complete, searchable copies of Business Insurance going back the magazine’s launch in 1967, click here.