Recovery Steps

Washington has taken rare steps toward building a federal disaster plan. Not everyone agrees this is a good development but property owners in the Southeast should be watching closely as they could be among the most affected — whether a final plan is enacted or not.

Earlier this month, the House of Representatives passed H.R. 3355, the Homeowners’ Defense Act of 2007. The bill, sponsored by Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla., attempts to address the growing problem of insurance availability in disaster-prone states. Nearly-identical legislation has been filed in the Senate by Sen. Bill Nelson, D-Fla., and Sen. Hillary Clinton, D-N.Y.

The legislation creates a pool or consortium for state-sponsored insurance funds to voluntarily bundle their catastrophe risk with one another, and then transfer that risk to the private markets through the use of catastrophe bonds and reinsurance contracts. Proponent say this arrangement will mean that private markets — not tax dollars — would take on the risk.

The bill also provides for loans that could be extended to any state that faces a significant financial shortfall following a natural catastrophe.

Insurance agents — who deal with the homeowners in these areas every day — welcomed the House action. “The current dysfunction in the natural disaster insurance market requires Congressional action, and passage of the Klein-Mahoney bill is a great first step towards a comprehensive solution,” said Charles E. Symington Jr., senior vice president of government affairs and federal relations for the Independent Insurance Agents and Brokers of America.

But the approach has been dismissed by some insurers and reinsurers — who may be removed from the market problems agents and homeowners are facing because they sometimes talk as if the private market has the situation under control. Marc Racicot, president of the American Insurance Association, said the “private insurance system continues to be well-positioned to manage natural catastrophe risk, and the best course is to improve, not displace, the private sector’s ability to serve homeowners and businesses that could face losses from natural catastrophes.”

He maintained that the legislation won’t help. “It will not generate new private sector insurance, reinsurance or capital market capacity, and is likely to encourage states to create thinly financed, state-run reinsurance facilities that will displace the private market and require a federal government bail-out in the event of a catastrophe,” Racicot warned.

These insurers and reinsurers could be right that the bills will do nothing to improve private insurance. But homeowners who need coverage now may not care whether they are bailed out by private or public dollars after the next storm — as long as the help is there when they need it.

The Bush Administration balks that the bills would create a permanent role for the federal government in disaster recovery, which the White House does not see as a federal government responsibility. The Senate has not yet taken up its bill, while the Klein-Mahoney bill passed in the House 258-155. That falls short of the two-thirds needed to override a White House veto should it come down to that.