Funding fiasco? a Best's Review survey suggests a federal catastrophe fund could be disastrous for the industry.

The proposed creation of a federal natural catastrophe backstop would be "detrimental" to the industry and encourage continued development in risk-prone areas, according to a recent Best's Review survey of online subscribers and visitors to the magazine's Web site. Yet if a backstop were created, most respondents said they'd want a coverage trigger of $100 billion.

While agents, brokers and advisory organizations beaded the list of survey respondents at 39%, insurance companies were highly represented too, at 38.2%. Other entries came from across the industry: consultants, underwriters, regulators, risk management firms, reinsurance, analysts, premium finance, banks, financial lenders, government agencies, and one listed simply as a patriotic organization.

Some 46.7% of respondents said they would not support the creation of a national fund by the federal government to backstop major natural disasters along the lines of Hurricane Katrina or the San Francisco Earthquake and Fire of 1906. In addition, 27.5% of respondents said they foresaw no potential advantages to creating a federal natural disaster backstop.

Yet 41.6% supported the creation of such a fund, with 26.3% noting it would allow for planning before a disaster--rather than ad hoc solutions after a catastrophe has struck. Others felt a federal cat backstop could expand coverage in Florida and other areas with an availability crisis.

But the "no's" were prevalent--even among those who bypassed the choices of potential advantages and offered their own answers, half said there would be none.

The biggest potential danger to a federal backstop is encouraging continued development in risk-prone areas, 42.9% of respondents said. Another 25.4% felt it would force taxpayers in low-risk areas to subsidize those in high-risk areas. Others suggested a cat backstop would take away the incentive to insure for homeowners in high-risk areas because they would expect a government bail-out, which in itself would encourage federal government intervention in the insurance industry.

If a federal backstop were created, respondents said it would allow them to write new business in coastal areas and states where they do not normally write, perhaps Florida; but it also would force noncoastal and low-risk homeowners to subsidize homes for those in high-risk areas.

While respondents from states in the tornado belt balked at subsidizing coastal states, those in high-risk areas would welcome a federal backstop. "You bet in Houston, Texas," noted an agent. "We have not been able to sell new homeowners for almost five very long years." The agent likened the scope of the problem to "being a McDonald's restaurant and not being able to sell fries."

Most respondents to a multiple-choice question for funding a disaster backstop bypassed the choices and offered their own; many said it should be funded by taxpayers or policyholders based on their risk of catastrophic loss. One suggested a proposed backstop be funded by taxes on tobacco products: vehicles over $40,000; alcohol, firearms and ammunition: and the adult entertainment industry.

If a federal backstop is not created, respondents were split as to whether a regional catastrophe fired could work. They did offer alternatives such as making windstorm and flood coverage mandatory; strengthening federal building codes and enforcement in high-risk zones; building catastrophe-resistant structures; tax relief; reinsurance; risk-pooling; state cat funds; letting insurers, not regulators, set actuarially sound rotes; and simply letting the free market system do its thing.

What is the greatest potential advantage to creating a federal natural disaster backstop?

"There would be short-term advantages in reinsurance costs and availability. ... Adverse consequences would be more government involvement in the industry, less incentive to build with fortified construction standards, subsidized rates (e.g., the Federal Flood Program), etc."--Insurance company

"Not only does it provide planning before the disaster but provides funding from all across America for whatever natural disaster might strike. The next one could be the New Madrid fault. Who knows?"--Agency, brokerage or adviser organization

What is the greatest potential danger to creating a federal natural disaster backstop?

"It subsidizes irresponsible people who do not want to purchase insurance to cover their exposures.... No one should subsidize their stupidity." --Insurance company

"If you know that the homes are located in a natural disaster area by historical data, then WHY would you set yourself and our government up for guaranteed failure and ridicule?"--Agency, brokerage or adviser organization

If a federal backstop is created, how will it affect the way you do business?

"Being from New Orleans, it will create a market that doesn't exist at this time."--Agency, brokerage or adviser organization

"... I befieve that my employer's services would become even more necessary to help assess, price and accept risk."--Consultant to property insurance industry

If a federal backstop is not created, what alternatives should insurers pursue? Can regional catastrophe funds work?

"The IRS should recognize that catastrophes are real and expected costs of doing business, and allow insurers to reserve for them appropriately"--Other insurance-related company or organization

"Regional cat funds will not work on the broad scale. How could the poor communities of New Orleans fund the exposure that they have in a flood-prone area?"--Agency, brokerage or advisory organization

Do you favor the federal government creating a
national fund to backstop the risk of major natural
disasters on the scale of Hurricane Katrina or the
1906 San Francisco earthquake?

46.7%   No
41.6%   Yes
11.8%   Not Sure

What is the greatest potential advantage to
creating a federal natural disaster backstop?

27.5%   No potential advantages.
26.3%   Allows for planning before a disaster
        rather than ad hoc solutions after a
        catastrophe has struck.
14.3%   Expands coverage in Florida and other areas
        currently seeing an availability crisis.
13.5%   Ensuring the solvency of the industry.
12.7%   Other
 5.6%   Providing an alternative to costly reinsurance.

What is the greatest potential danger to
creating a federal natural disaster backstop?

42.9%   Encourages continued development
        in inherently risk-prone areas of
        the country.
25.4%   Forces taxpayers in some regions of the country to
        subsidize other regions.
15.1%   Other
 9.1%   Invites regulators to supress rates.
 4.8%   Crowds out private insurance or reinsurance capacity.
 2.8%   No potential dangers.

If a national fund were created to backstop natural
disaster risks, how large should a catastrophe
event be to trigger coverage?

33.6%   $100 billion
24.2%   $50 billion
18.8%   $500 billion
14.8    $25 billion
 8.5%   $200 billion

How should such a backstop be funded?

20.2%   Other
19.4%   Direct assessments on insurers that would
        be backstopped by the fund.
17.8%   Assessments on state and regional catastrophe
        funds that participate in the program.
17.4%   Through post-event bonds that could be
        repaid by those that collect from the fund.
14.5%   Through the sale of reinsurance to
        insurers or reinsurers.
10.7%   By taxpayers.

What is your work?

39%     Agency, brokerage or
        adviser organization.
38.2%   Insurance company.
13.5%   Other
 9.2%   Other insurance-related company or organization.

Note: Table made from bar graph.