The Democratic and Republican parties’ decisions to include language about catastrophic insurance in their party platforms brings attention to a debate that has been raging since the devastating hurricane season of 2005: how to pay the costs when it eventually happens again?
The Homeowners Defense Act of 2007, passed by the House, would create a national fund that would act as a backstop for state catastrophe programs, providing reinsurance capacity in the event of further large disasters. Proponents say this kind of fund, along with some limits on development in disaster-prone areas and increased funding to first responders, is the best and least expensive way to make sure the funds are there when disaster strikes. But opponents say federal funding is expensive and unnecessary and will replace the traditional insurance market for homeowners insurance with a government-backed program that could cost taxpayers hundreds of billions of dollars.
The Democrat platform explicitly supports this legislation, while the Republican party platform advocates a partnership between businesses and FEMA and does not take a specific stance on the bill. But Republican candidate John McCain has said he opposes a national catastrophe fund.
“What we’re advocating is catastrophe funds at the state level that would be funded by insurance company premiums and provided a level of reinsurance-like coverage,” for the 1 in 100 and 1 in 200-year events, said Pete McDonough, a spokesman for Protecting America, which supports the legislation. “We’re not talking about the occasional storm that knocks the investment banker’s house off the bluff in East Hampton.”
The goal is to provide an extra layer of protection for the most disastrous storms and earthquakes, he said, and guarantee that coverage is available even in volatile capital markets. “This is not intended to replace the traditional insurance market at all,” he said, but rather help the states provide affordable coverage for the six in ten American families living in disaster-prone areas. His organization believes the government could manage this fund more cheaply than the current reinsurance marketplace.
Not so, says Eli Lehrer, a senior fellow at the Competitive Enterprise Institute, a member of Americans for Smart Natural Catastrophe Policy, which opposes the national catastrophe fund and other related legislation. “The truly accurate premiums would very likely be higher than the premiums that are currently asked for by private insurance. The only way they’d get lower costs is through an implicit government subsidy” that set rates artificially low and shifted the burden to taxpayers.
Sonecon LLC Chairman Robert Shapiro, who co-authored a report on the potential financial costs of such a program, said that while lower-income people should have access to government help, for most people, the private insurance market covers the risks already. “Not only does private insurance cover [the liability] well, it sends the right signals,” discouraging development in disaster-prone areas through high rates, and encouraging home and business owners to mitigate their potential losses with structural improvements.
As for “rich, stupid people” who insist on building whatever they want, wherever they want? Lehrer says, “If their house gets blown away, what they should expect from the government is a rescue boat and a bill.”
Shapiro said another major concern is that by creating the funds required to access the federal backstop more states would become like Florida, which currently has few private insurers providing catastrophic insurance because regulators set rates very low after 2005’s hurricanes and insurers left. If private insurers pull out in other states, more homeowners will need to seek insurance from the state funds, increasing the ultimate cost to taxpayers, he contends.
