The chairman of the U.S. House Financial Services committee promised to quickly take up a bill seeking to stabilize the property insurance market in disaster-prone areas.
The bill, introduced last week and prepared by Democratic Florida Reps. Ron Klein and Tim Mahoney, would use private investors to build a national backup fund that states could use after the worst catastrophes.
“We plan to have a hearing on this as soon as we come back in September,” said Rep. Barney Frank, D-Mass. and the Financial Services chairman, who predicted it would be approved.
Under the bill, investors would take the chance that a Category 5 hurricane wouldn’t make a direct hit on an area like Tampa Bay, or that a major earthquake wouldn’t be centered in a city like San Francisco. If disaster did not strike, they would get their original investment and interest returned after the contracted period, likely between two and four years.
If however, a disaster is so large that state catastrophe funds and private insurance cannot cover losses, investors could lose some or all of their investment, depending on how much of the federal fund is depleted.
That would only happen if a so-called 100- to 250-year event – such as the worst hurricane, earthquake or tornado that could be expected over that period – struck a major population center.
But because insurers have to plan for the possibility of such an event by purchasing high-priced reinsurance, premiums are high in places like Florida, if policies are available at all. The hope is that the national fund would create a cheaper reinsurance option and thus bring down premiums and make coverage more available.
Previous attempts to create a national fund have failed because proposals involved adding a surcharge to all property insurance policies to build it, and representatives in states that are not prone to disasters did not want their residents paying more.
The new proposal, though, gives states the option of participating and is driven by private investors.
“This is voluntary,” said Klein. “The states that want it can opt-in. The state’s that don’t have the need for it … they don’t get involved. There’s no burden, there’s no impact.”
Congressmen from 20 states are signing on as bill co-sponsors, including representatives from states like Ohio and Wisconsin that aren’t very prone to catastrophes.
The national fund would only be available to states that already have state-run catastrophe funds or insurers of last resort. As part of the program, the federal government would provide loans to state insurance funds to make sure they could handle claims.
‘”What the federal government is going to do is make sure that they’re going to provide the capital necessary to back up states as well as to support the insurance company,” said Mahoney.
President Bush’s administration has opposed the idea of a national catastrophe fund. Edward Lazear, chairman of the White House Council of Economic Advisers, has said the Bush administration opposes the idea because it would displace the private market and have unintended economic consequences.
But Frank said politics could play a role in deciding whether to sign the bill if it reaches Bush.
“This is Florida. 2008 is a presidential election year. I would not be certain that the Republican administration would veto a bill that is as broadly supported as this one is going to be in a presidential election year,” Frank said.
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