A day after a similar bill was introduced in the Senate, the House of Representatives passed federal legislation to 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.
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.
The approach has been dismissed by some insurers as doing nothing to improve private sector insurance availability but welcomed by insurance agents as part of the solution for consumers.
The bill passed 258-155, which falls short of the two-thirds needed to override a presidential veto should that happen.
The legislation —HR335 known as Homeowners’ Defense Act of 2007 — has been championed by Reps. Ron Klein (D-Fla.) and Tim Mahoney (D-Fla.
Insurance agents welcomed the House action.
“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 theBig “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 in coastal insurance markets.
“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 associate 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.
“Residents in Florida are facing an economic crisis in large part due to homeowners’ inability to find affordable homeowners insurance. This bipartisan solution to the homeowners’ insurance crises will put an end to government bailouts which unfairly tax all Americans,” said Rep. Mahoney.
Sen. Hillary Rodham Clinton, D-N.Y., and Sen. Bill Nelson, D-Fla., have introduced companion legislation in the Senate.
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