With the federal Catastrophe Obligation Guarantee Act proposal, state funds say they aren't looking for a bailout, just a little back-up so that the states can gain access to capital markets in order to pay claims when an extreme catastrophic event occurs.

Glenn A. Pomeroy, chief financial officer of the California Earthquake Authority, said the federal proposal could mean more people in California insured against earthquakes at lower rates, while "making sure that we manage the risk ourselves."

"This is not meant to be a bailout," Pomeroy, the former North Dakota insurance commissioner, said. "We are not asking North Dakota to subsidize. Stand by us if we need to borrow money privately."

Sen. Bill Nelson, D-Fla., introduced the bill, S 886, which would have the U.S. Treasury guarantee bonds issued by the state cat funds in Florida, Louisiana and Texas, as well as the CEA. Rather than a bailout, it would be a promise to essentially act as a co-signer in borrowing.

Pomeroy, at the recent National Association of Insurance Commissioners meeting in Minneapolis, outlined several alternatives of how CEA's funding structure could change if the bill was enacted. In each scenario, Pomeroy and representatives for the other states covered by the bill said they'd be less reliant on reinsurance. While acknowledging reinsurance as a "critical component," he said the CEA's purchasing level is "not a terribly efficient way" to run the authority.

Of the $5.4 billion in premiums collected since the CEA began in 1997, 40% "went out the door to reinsurance premium," Pomeroy said. "It's an inefficient approach to managing risk."

The four states, which met in Washington early this year to consult in the drafting of the legislation, say they have a better way. "Pay for the big one only when it happens," Pomeroy said.

"We are trying to break down the dynamic currently in place," Pomeroy added. "We are forced to collect enough to withstand a hugely unlikely event. We are looking to insure all likely events, then borrow for the unlikely."

Under the current funding structure the CEA has enough capacity for a one-in-545-year catastrophic event. Without borrowing, the CEA says it could continue to have enough to pay claims for a 1-in-200 year event and the probability that the authority would need to borrow is only 0.5% to 1%, Pomeroy said. That probability was determined after running 50,000 events through the models.

"In one year we can have a repeat of the Northridge earthquake and 1906 San Francisco earthquake -- that's what it would take for us to borrow," Pomeroy said. According to the legislation, the feds would guarantee $5 billion for the CEA to borrow in the event of a mega-catastrophe. Pomeroy said the debt can be paid back with "modest premium increases."

Louisiana Insurance Commissioner Jim Donelon said he was "enthused" about COGA when it was first introduced. He assured fellow regulators at the NAIC meeting that it was not a scheme to subsidize but it was meant to benefit them because right now, taxpayers would be immediately responsible in the event of a mega-catastrophe. He said the bill provides an incentive for California, Florida, Louisiana and Texas to "protect themselves to an extent that is reasonably feasible."

Florida Insurance Commissioner Kevin McCarty said the bill could help his state as well as other states that may be encouraged to seek solutions that may or may not include the establishment of their own cat funds. COGA would most certainly help out the Florida Hurricane Catastrophe Fund sell post-events bonds. Though reports have been improving, the fund once faced a potential $19 billion shortfall. However, the commissioner also said there would need to be a "sequence of future events for us to change the dynamic in our culture."

"This makes perfect sense for them," said Pomeroy of Florida. "They have the ability to assess all insurers. They can pay the debt."

COGA has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Pomeroy said he hasn't gotten any indication the bill will receive much attention but, of course, he's hoping "they give it a look. It is such a good proposal. We're only asking that the government gives us a guarantee."