Two House subcommittees have scheduled a joint hearing today on ways to address homeowners insurance costs in disaster-prone communities, an issue that has some environmentalists, taxpayer groups and insurers standing together.
Testimony at today’s hearing will revisit the Homeowners Defense Act (H.R. 2555), a bill that would provide a federal backup for states with catastrophe insurance funds and which its sponsor, Rep. Ron Klein, D- Fla., maintains will reduce the cost and improve availability of homeowners’ insurance around the country, not just in his state of Florida.
Sen. Bill Nelson (D-Fla.) has filed a corresponding bill in the Senate.
While the bills have their backers within political, consumer and even insurance circles, they have also united environmentalists, taxpayer groups and insurers in opposition. Backers say they would reduce the cost of insurance and of post-disaster cleanup, while opponents contend that’s why they should be blocked. Further government subsidization of catastrophe insurance will only perpetuate the current problems, burden taxpayers and encourage even more building in environmentally locations, say these critics, who favor stronger mitigation and prevention efforts.
The joint hearing will be presided over by Rep. Paul E. Kanjorski, D-Pa., chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, and Rep. Maxine Waters, chairwoman of the Subcommittee on Housing and Community Opportunity.
The Homeowners’ Defense Act would allow up to 30 states to choose to share risk in a catastrophe insurance pool that would be backed by federal reinsurance. The bill would also provide federal guarantees of bonds issued by the state funds. It also encourages states to adopt mitigation measures and comprehensive land use plans– which its critics say should be the primary focus instead of insurance subsidies.
Klein says his approach would mean more protection and mitigation would be in place before a disaster, which would mean less cost for taxpayers for post-disaster cleanup.
“Whether it is a hurricane in Florida, an earthquake in California, a wildfire in Arizona or a tornado in Kansas, there is no reason why we can’t spread the risk across states and natural disasters in order to bring down prices for homeowners,” Klein said when he first introduced the measure several years ago. “At its heart, this bill is designed to make sure insurance is doing what it is supposed to do: spread the risk.”
Proponents contend the bill is one answer to problems identified in a report commissioned by ProtectingAmerica.org, a non-profit organization consisting of emergency management officials, first responders, disaster relief experts, insurers and others. Its members include the American Red Cross and large insurers Allstate and State Farm.
The report found that catastrophe relief in this country now relies on all taxpayers to bailout people who reside in areas susceptible to catastrophic weather events. Also, the current system distorts the incentives of residents in exposed areas to take actions to lessen the potential damage to their properties or families, according to the report.
A 2007 Milliman report found that if a national backstop mechanism were to be enacted and state catastrophe funds are created consumers could realize annual savings in excess of $11 billion in their homeowner’s insurance premiums. State-by-state savings would vary but, for example, annual savings per household in California would average $256; Louisiana, $224; North Carolina, $132; and Oregon, $127, the report found.
“Part of the beauty of this approach is that residents of risk-free states would not pay a dime into a catastrophe fund. This would significantly reduce the current cross-subsidy that occurs when the federal government steps in to repair and rebuild in the aftermath of regional catastrophes,” Admiral James Loy, former Deputy Secretary of Homeland Security and ProtectingAmerica.org co-chair, has previously testified.
But critics, including an unusual coalition of insurers, taxpayer groups and environmentalists that goes by the name SmarterSafer.org, say the Klein approach does nothing to solve the underlying issues and would simply perpetuate a flawed and costly approach. They say the Klein approach would undermine private markets and force taxpayers to bail out states such as Florida along with owners of expensive coastal homes.
It would also harm the environment by encouraging continued building in environmentally sensitive locations, development that erodes natural barriers to storms and their impact, argue critics.
“We have no doubt that Rep. Klein’s efforts to ease Floridians’ insurance rates are well intended, but we are extremely concerned that providing a federal insurance subsidy will create incentives for more development in environmentally sensitive coastal areas and increase exposure to hurricane-related risk. This could leave people more exposed to harm and at the same time increase, rather than decrease, adverse impacts to the environment,” environmental groups belonging to SmarterSafer.org wrote to lawmakers recently.
The environmental groups — including the Environmental Defense Fund and the Sierra Club– argue that if coastal state and local governments allow development to continue as usual, then federal backstop guarantees or reinsurance will almost certainly result in more development in high-risk areas. “HR 2555 would perpetuate ill-conceived or unwise development decisions,” they say.
The groups point to the experience of the National Flood Insurance Program, which they said has kept consumers’ flood insurance costs low, but has “done too little to reduce risk, and in fact it has been a major factor in increasing risk” by encouraging the building or rebuilding of high-risk properties. The flood insurance program is now nearly $20 billion in debt.
Other critics contend that Klein’s measure is really a way for U.S. taxpayers to rescue Florida from its property insurance market where rates have been suppressed. Florida should fix its problems without federal help, they contend.
“The state of Florida is well aware that its public insurance system is flawed—under the state program, Citizens Property Insurance Corp., homeowners who live on the coast pay only a fraction of actuarial rates. These subsidies are not means tested—affluent homeowners with beachfront property are being subsidized by those who live in less risky, and in some cases less wealthy, areas of the state. While Florida could make changes to ensure its system is on solid financial footing, including purchasing reinsurance or floating catastrophe bonds in the private market, the state has chosen to continue its under-capitalized system in hopes that the federal government, and all taxpayers, will bail them out,” SmarterSafer.org said in a recent letter to House Financial Services Chairman Barney Frank and Ranking Minority Member Spencer Bachus.
“Rep. Klein wants to spend taxpayer money to bail out the rich,” said Christian Camara of the Florida office of the pro-business group, Competitive Enterprise Institute, when the bill came up last year. “His proposals simply won’t work and they’ll cost a lot of taxpayer money.” CEI is a member of SmarterSafer.
SmarterSafer members also include the Reinsurance Association of America, Chubb, Liberty Mutual, the National Association of Mutual Insurance Companies, the National Association of Professional Insurance Agents, Swiss Re and Zurich Insurance.
SmarterSafer supports several mitigation bills that its members say would better protect homeowners and save taxpayer money. One such bill is H.R. 3377, which authorizes new investments in pre-disaster mitigation, modernizes the nation’s public warning systems, and provides incentives to states to adopt improved building codes.
Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA), is also among those who have written to lawmakers to oppose Klein’s bill.
In her letter, Pusey urges lawmakers to explore changes that would encourage private markets to manage the nation’s catastrophe risk without establishing new government programs or burdening taxpayers in less-risky areas.
“Although well-intended, H.R. 2555 will not generate new private sector insurance, reinsurance or capital market capacity. Instead, it is more likely to encourage the development of state programs that will displace the private market and require a federal government bailout in the event of a catastrophe,” Pusey wrote.
Pusey also says the multi-state risk pool envisioned under Klein’s measure is unnecessary.
“[S]tates already have the option to pool their risk with other states, but have chosen not to do so. This is because a lower-risk state receives no benefit in pooling its risk with a relatively higher-risk state,” she wrote.
Also, individual state programs can access capital markets today, without being part of a new government consortium, and private insurance markets continue to assume catastrophe risk, she told lawmakers.
Some of the reforms backed by AIA insurers include improved building codes and mitigation efforts, tax incentives to encourage residents to take more responsibility for catastrophe prevention, and reforms to the National Flood Insurance Program.
The Independent Insurance Agents and Brokers of America were also scheduled to weigh in at today’s hearing.
“The lack of affordable natural disaster insurance in many parts of the country requires Congressional action, and the consideration of H.R. 2555 is a good first step towards solving this national problem,” says Charles E. Symington, Jr., Big “I” senior vice president of government affairs.
The Big “I” supports the goals of each of these programs, but also would like changes to the reinsurance portion of the legislation in particular.
“While the Big ‘I’ appreciates the inclusion of a national reinsurance backstop in the Homeowners’ Defense Act, such a backstop would better encourage private market participation in problematic markets if it called for private insurer access instead of just state catastrophe funds,” says Symington. “We will continue to advocate that Congress consider a solution utilizing the private markets instead of merely state catastrophe funds.”
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