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Look What Happens When Insurers 'Run Naked'

Given the uproar at town hall meetings on health care, it's interesting that Americans seem to be mute on other kinds of government insurance, particularly the type that protects million-dollar beachfront properties.

A recent story in ClimateWire says that public insurance programs in several coastal states are "flirting with the notion of saving millions of dollars by shrinking or canceling the coverage they buy from private reinsurers."

In insurance parlance, this is called "running naked," and it's about as safe as streaking down the street; someone is either going to call the cops or run you over.

So how does it work? States provide insurance for people classified as bad drivers and for coastal area homes where private insurers would - at least in their minds - overcharge or simply refuse coverage.

But what if Hurricane Bill changes direction and clobbers the mainland with billions of dollars worth of destruction? That is why states, and private insurance companies, buy "reinsurance," which is basically insurance for insurance companies. These deep-pocket reinsurers, many of which are based on the island of Bermuda and run by hedge funds, take on the risk.

But now states like Texas are saying "no thanks" to reinsurance and cash-strapped California is looking to cut its reinsurance coverage.

Does this make sense? It does if you go long enough without a disaster, like a hurricane or earthquake, because the growing amount of the premiums you write will pay for the disaster if it happens. But if state legislators find this bankroll, they will likely get their hands on it.

One example is Allstate, the nation's largest publicly-traded insurer. Under former CEO Ed Liddy, who recently left that same position at American International Group, Allstate decided to "run naked" with no reinsurance in Louisiana in 2005. When Hurricane Katrina hit, it ultimately cost Allstate more than $3 billion.
States like Florida, California, Louisiana and Texas have an answer: the federal government. They are lobbying Congress to pass a bill which would make all of us co-signers for states that borrow money to pay off claims for floods, fires and earthquakes.

If it passes, we won't be "killing Grandma," as the opponents of health care charge. But we would be "taxing the unborn" to pay all this debt for people who choose to live in geologically unsafe areas - and don't want to pay for it in their insurance premiums says Insurance Information Institute President Robert Hartwig.

"It's going to be a difficult lift," admits Florida Insurance Commissioner Kevin McCarty, who favors the proposal. "We are competing (for President Obama's attention) with national health care."

And we all know how that's faring.