Knob and tube wiring is usually fine as long as the insulation on the wires hasn't deteriorated and started to fall off. Course none of us here can see the installation to know if it's safe or not. The splices need to be installed properly and K &T is not allowed to be covered with insulation. Here's a link that'll tell you a bit more about older wiring.
http://www.oldhouseweb.com/stories/Detailed/10327.shtml
You'll need to ask your insurance company what their requirements are, no way for anyone to know the answer besides them.
And I would suggest getting a couple more estimates for the job to see what other electricians suggest, try to hire companies that are familiar with older wiring.