Bush Administration Rejects Pleas for Federal Disaster Plan

By | April 13, 2007

Warning of another looming hurricane season, lawmakers including Florida Gov. Charlie Crist pleaded this week in Washington for a national catastrophe fund to help stabilize an insurance industry that they say has gone berserk in coastal areas.

The Bush administration shot down the idea, however, and a leading Democrat promised only to create a commission to study the issue.

Crist, a Republican, joined Florida Sens. Bill Nelson, a Democrat, and Mel Martinez, a Republican, on the lead witness panel at a Senate banking committee hearing, saying that rising insurance premiums after recent hurricanes are driving people from their homes. Lawmakers from other Gulf states, the Northeast, and elsewhere have also voiced support for such a national program, which would establish a backup for property insurance similar to a federal program set up for terrorism insurance after the Sept. 11 attacks.

“Traditional insurance market mechanisms are not adequately managing catastrophic risk,” Crist said, accusing insurance companies of profiting from disaster-stricken communities. “Floridians are being forced to choose between paying skyrocketing insurance premiums or selling their homes.”

A Bush administration official — joined by some industry representatives — countered that such a program would undermine the private market and ultimately cost taxpayers more.

“Government insurance would displace insurance provided by the private market,” said Edward Lazear, chairman of the White House Council of Economic Advisers. “For the most part, the national insurance industry is healthy today.”

Lazear said recently enacted Florida legislation aimed at reducing homeowners’ rates by giving insurers access to cheaper, state-backed backup coverage will drive private insurers away, reducing competition. The plan charges artificially low rates, he said, meaning it will likely require a taxpayer bailout or large assessments on policy holders to cover the next big storm.

Sen. Richard Shelby of Alabama, the ranking Republican on the committee, said a national fund also would leave taxpayers everywhere paying to cover vulnerable coastal locations, including ritzy houses on the beach.

Crist and others disputed that argument, saying the fund would cover all types of catastrophes in every region, such as earthquakes. Besides, federal taxpayers already pick up the tab for events like Hurricane Katrina in the form of disaster assistance. It’s wiser to create a fund on the front end that could earn interest and hold down insurance rates, they argued, even if it requires a taxpayer subsidy.

“Our current system is based largely on a post-event reaction,” said Alabama Insurance Commissioner Walter Bell, adding that the United States is one of the only industrialized nations in the world without a comprehensive catastrophe plan.

The panel also heard from David Guidry, who owns a small manufacturing business in New Orleans. He said the cost and availability of insurance is a major factor behind the city’s flagging economy and has left him struggling to keep his company afloat. Another witness, Harold Polsky, said he and his wife were forced to sell their Florida home and move to Virginia last year after their insurance premiums jumped from $1,758 in 2002 to $2,859 in 2006.

Committee Chairman Chris Dodd, D-Conn., stopped short of endorsing a national fund and said he would work to quickly create a national commission of insurance experts to develop consensus from a divided industry. But he agreed that the issue is a “national problem that demands national attention.”

Dodd also offered several short-term proposals, including offering property owners in areas with rising premiums a new tax deduction.

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