Congress Considers Disaster Legislation to Alleviate Coastal Insurance Crisis

Disaster legislation is hot on the minds of congressional leaders this month as a handful of bills made their way to both the House and the Senate addressing the issue. Some legislation takes aim at making the property insurance in disaster-prone states more available while other legislation provides for assistance to homeowners and businesses to lessen the financial strain after natural disasters.

A bill passed by the House would help hurricane and disaster-prone states make property insurance more readily available to residents through state funds.

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.

Proponents 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.

The approach has been dismissed by some insurers as doing nothing to improve private sector insurance availability but was welcomed by insurance agents as part of the solution for consumers.

The White House has threatened a veto.

The legislation — HR3355 known as Homeowners’ Defense Act of 2007 — has been championed by Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla. The bill passed 258-155, which falls short of the two-thirds needed to override a presidential veto should that happen.

Sen. Hillary Rodham Clinton, D-N.Y., and Sen. Bill Nelson, D-Fla., also introduced companion legislation to HR 3355 in the Senate on Nov. 7.

Industry at Odds

Insurance agents welcomed the House passage of HR 3355 while applauding the introduction of the Senate version.

“As the representatives of the independent insurance agents who sell and advise consumers on homeowners’ insurance, we feel it is important that Congress encourages both a healthy and vibrant private market as well as secure state and regional reinsurance programs, and it is our view that this legislation takes a step toward both,” said John Prible, assistant vice president for federal government affairs for the Big “I,” the Independent Insurance Agents and Brokers of America.

But Marc Racicot, president of the American Insurance Association (AIA), said the legislation falls short in trying to address the problems of coastal insurance.

“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,” he advised.

“The legislation would create incentives for states with well-functioning, private insurance markets to establish state-run reinsurance facilities, because they can take advantage of cheap federal loans,” the AIA leader added.

Racicot said that 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.”

The White House, through the Office of Management and Budget, said it opposed the legislation because it would create a permanent role for the federal government in disaster insurance.

“Although pooling can be an effective mechanism for managing risk, there is no need for a federal role because states are currently free to address catastrophe risk,” the OMB said. “Further, the consortium’s federal charter would create an implicit guarantee that the federal government backstops the consortium’s financial obligations. This implicit guarantee would result in an inequitable federal subsidy for certain state insurance programs and policyholders.”

The Administration also said it “strongly” opposes the provision calling for loans to states.

The House sponsors said the issue is an appropriate one for the federal government.

“This is not just a Florida issue. With the rising number of catastrophes throughout the United States, ranging from states like New York and California to the Midwest, more and more people are realizing this is an issue that cannot be ignored,” said Rep. Klein.

Reinsurers Opposed

The nation’s reinsurance industry criticized The Homeowners’ Defense Act of 2007 as raising false hopes about addressing problems facing the coastal insurance market at the expense of U.S. taxpayers and disenfranchising the private marketplace. Reinsurers say the measures are bad for homeowners in areas with low catastrophe risk and bad for private insurance markets.

“Government is not the right solution. The capital markets and the insurance/reinsurance industry have demonstrated their ability to meet natural catastrophe risk transfer needs of insurers and consumers when market dynamics are allowed to work. This legislation will do nothing more than disrupt the marketplace,” said Franklin W. Nutter, president of the Reinsurance Association of America (RAA). Nutter went on to say that the bills are based on the false premise that a federal role in homeowner’s insurance is necessary because natural disaster risks occur throughout the country. “What these bills ignore is that homeowners in each part of the country pay insurance premiums based on their local risk, not risk to natural catastrophes in other parts of the country,” he continued.

The proponents of both bills, including ProtectingAmerica.org, argue that the catastrophe insurance market is “in crisis,” and that creating a federal program to provide for low-interest loans to any state reinsurance fund facing a financial shortfall following a natural disaster will stabilize it.

But Nutter argues that the approach is flawed.

“State insurance programs, like those in Florida, that encourage states to replace or compete with the private sector by under-pricing catastrophe risk and subsidizing it by assessing low or even ‘no risk’ consumers, turn sound risk management on its head. Under the House-passed measure, consumers who do not live in catastrophe-prone coastal areas will bear the price of this flawed legislation,” he maintained.

He called HR 3355, and its companion bill in the Senate, “Trojan horses for those who seek to subsidize coastal development by assessing taxpayers and those with little or no coastal catastrophe risk.”

Other Legislation

Federal disaster legislation that reinsurers do support includes two bills recently introduced by Sen. Chris Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee and presidential candidate.

Dodd says that immediate assistance is needed for those living near coastal areas who are grappling with skyrocketing property insurance premiums, and that his legislative initiatives will help homeowners and businesses lessen the financial strain experienced as a result of natural disasters.

The first measure, the Homeowners Insurance Assistance Act of 2007, would provide tax credits to homeowners who face skyrocketing insurance premiums in coastal areas. The tax credits would be used to offset the costs of homeowners’ insurance premiums and targeted to those most in need. The tax credits would be available for one year to provide temporary assistance to affected homeowners in their primary residence. These tax credits will provide homeowners with needed financial relief in the short-term.

The second piece of legislation, the Property Mitigation Assistance Act of 2007, would provide resources to homeowners and business owners to help protect their properties and reduce the future financial risks they face from natural disasters. Under the legislation, federal funds would be used by states to help property owners elevate endangered portions of homes, build safe rooms, and install other devices such as storm shutters to protect properties.

“We need to explore any and all long-term solutions to helping homeowners and business owners,” said Dodd.

Dodd’s approach won applause from RAA’s Nutter. “Senator Dodd’s legislation is the right solution to affordability and availability of insurance in disaster-prone areas,” said Nutter. “Federal assistance should be focused on people, not insurance companies.”