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If the very, very worst happens, who will pay?

A few months ago, when Bill McCollum was campaigning around Florida in his unsuccessful bid for the U.S. Senate, he tried to reignite an issue that Washington had long neglected.

Why not create a national catastrophe fund to help cover losses from a huge hurricane or earthquake? McCollum proposed such a plan while in Congress in the 1990s, but it didn't get any traction then. He got an equally lukewarm response on the campaign trail this year.

"Not a lot of people were paying attention," he said.

They're listening now.

Now that Hurricane Ivan has ripped through Florida's Panhandle, as well as Alabama, Mississippi, Louisiana and Tennessee. Now that Hurricane Frances has torn roofs and flooded houses from Stuart to St. Petersburg. Now that Hurricane Charley has ravaged Florida's southwestern coast while Tropical Storm Gaston has turned the historic district of Richmond, Va., into a waterlogged mess.

"I think this (series of hurricanes) will resurrect support for some type of federal mechanism to address catastrophic risk, and it may also include terrorism risk," Joseph Annotti, vice president of public affairs with the Property Casualty Insurers Association of America, said last week.

"I'm fairly confident that this issue will be teed up early in the first part of 2005."

Others from Capitol Hill to Tallahassee say this hurricane season has provided a startling reminder of the grave possibilities of natural disasters. They predict some federal legislation will be considered to help prepare for a major catastrophe costing tens of billions of dollars, either through a federal backstop like a catastrophe fund or by giving tax credits to insurance companies so they can build up surpluses.

The problem is not Charley, Frances or Ivan. The insurance industry has enough reserves and reinsurance, the backstop policies that insurance companies use to insulate themselves from major losses, to handle each of them. The problem is not even the three storms combined. Together, their losses are expected to total far less than $25-billion, the outer limit of what Florida's insurance system is designed to handle.

The problem is the "What if?" If Charley had kept to its original course and roared into Tampa Bay, damage could have more than doubled. If Ivan had reclaimed its Category 5 form and angled only slightly more to the west into New Orleans, losses could have been in the tens of billions of dollars.

"We can handle a major, major event, but there is a point beyond which we would not be able to handle it," said Sam Miller of the Florida Insurance Council. "Most companies believe there is a need for a federal plan to kick in then."

Andrew's legacy

The context for the debate, like most issues involving Florida's homeowners market, is rooted in Hurricane Andrew.

After Andrew caused $15.5-billion in damage in 1992 ($20.3-billion adjusted for today's dollars), Florida's insurance market was decimated. A dozen insurers went insolvent; many of those that remained wanted to flee the state.

A bipartisan group of politicians and bureaucrats salvaged Florida's insurance industry by cobbling together what the state has today:

+ A statewide hurricane catastrophe fund, paid for with higher insurance premiums, that helps insurance companies cover claims after damage exceeds $4.5-billion.

+ Hurricane deductibles that make most property owners pay the first 2 percent to 5 percent toward damage before a claim kicks in.

+ Premiums two or three times higher than before Andrew.

Still missing from Florida's storm-reinforced insurance system _ more robust than any in the country _ is a plan for the cataclysmic: the once-in-100-years disaster that racks up insured losses of $40-billion or $50-billion.

Under Florida's current system, the insurance industry can handle up to $25-billion in losses through a complex mix of the state's catastrophe fund and deals with reinsurance companies. But once a single catastrophe exceeds $25-billion, there is no backstop.

That, ideally, is when a federal program would kick in, said Florida Chief Financial Officer Tom Gallagher, who was the state's insurance commissioner when Andrew struck. With the assurance that such a worst-case scenario would be covered, insurers would be more likely to write policies in Florida, he said.

Florida Gov. Jeb Bush thinks so, too. In an e-mail, Bush said last week that he does not have a particular program in mind, "but given the extraordinary costs associated with natural disasters, a well structured way to spread the risks would be helpful for everyone."

Sen. Bill Nelson, a Democrat who served as Florida's insurance commissioner after Gallagher, has argued for years that other states were short-sighted if they didn't think they were vulnerable to a national-scope catastrophe. The threat goes beyond hurricanes. An earthquake in California. A tsunami in Hawaii. And now, the threat of a terrorist strike.

In the late 1990s, a national catastrophe fund was debated heavily in Congress, though it never became law. The proposal was opposed by reinsurance companies that feared a government-sponsored fund would take away their business, and by legislators from inland states such as Iowa and Missouri that are less likely to face a large-scale disaster akin to a hurricane or earthquake.

"It doesn't make sense that someone in Kansas should subsidize someone who lives on stilts in Florida," said Bob Hartwig, chief economist for the Insurance Information Institute. "If you're a senator in North Dakota, why would you support this?"

The national threat of terrorism and the far-reaching effects of recent hurricanes may have since dampened some opposition among inland states. Yet, some reinsurers are still wary of any federal program, meaning resurrection of the bill is hardly a given.

Overall, though, the insurance industry sees more need for a national backstop than ever before, said Annotti of the Property Casualty Insurers Association.

"While insurance is a fantastic mechanism to make it affordable for people to finance high frequency, low severity type of risk, it may not be the best mechanism for financing risk of low frequency but virtually unlimited severity," he said.

But there is still the question of structure. Would a national program be funded through premiums paid by policyholders? Would some states pay less than others? And just when would national aid kick in?

Other states don't have the fallback of a catastrophe fund of their own to help swamped insurers. In Alabama, the lack of a state catastrophe fund already has fueled speculation that one of the state's biggest insurers, Alfa Insurance Group, may not be able to handle all the claims from Hurricane Ivan.

With or without a fund

Since McCollum left Congress, a new version of a bill proposing a federal backstop has been introduced by Rep. Dave Weldon, R-Melbourne.

Many are betting Congress won't take up the issue in the current session scheduled to end next month.

The dominant insurance issue in this pre-election session is whether to renew a federal terrorism insurance pool that expires at the end of the year.

Most expect the issue of a federal catastrophe fund to be taken up in January and, even then, face an upward fight toward passage.

Bryan Gulley, a spokesman for Nelson, said a related, pending bill by Rep. Mark Foley, R-West Palm Beach, may see action first. That measure, which is more palatable to reinsurers, would give insurance companies a tax credit for setting aside money in a surplus fund for such catastrophes.

Under current law, insurers can begin accumulating catastrophe reserves only after an event occurs.

Rade Musulin, vice president and actuary with the Florida Farm Bureau Insurance Cos., said the debate over whether or not to have a national plan is almost silly. Federal taxpayer dollars will wind up bailing out a devastated area with or without a catastrophe fund in place.

The choice, he said, is between a "chaotic, unplanned response" to a disaster vs. a program assuring "an orderly operation of markets and orderly process for the government to get involved."

"The insurance industry doesn't have infinite resources. . . . We have a system in place (in Florida) this year to handle three or four serious hurricanes or tropical events and could handle a single storm up to $25-billion. That's pretty seriously good, but how much can one state do?"

Jeff Harrington can be reached at or (813) 226-3407.



Insured loss+

Dollars In today's

Date Peril at time dollars

1. Sept. 2001 World Trade Center/ $20.3 $21.1

Pentagon terrorist attacks++

2. Aug. 1992 Hurricane Andrew $15.5 $20.3

3. Jan. 1994 Northridge, Calif., earthquake $12.5 $15.5

4. Aug. 2004 Hurricane Charley+++ $6.8 $6.8

5. Sept. 1989 Hurricane Hugo $4.2 $6.2

6. Sept. 1998 Hurricane Georges $2.9 $3.3

7. Jun. 2001 Tropical Storm Allison $2.5 $2.6

8. Oct. 1995 Hurricane Opal $2.1 $2.5

9. Oct./Nov.

2003 San Diego and San Bernardino $2.0 $2.0

counties, Calif., wildland fires

10. Sept. 1999 Hurricane Floyd $2.0 $2.2

+ In billions; ++ Property coverage only; +++ Preliminary estimate in 2004 dollars.

Note: No official estimate is available yet for Hurricane Frances and Hurricane Ivan, but both storms may make the Top 10 list.

Source: Insurance Services Office Inc.; Insurance Information Institute