As surely as there is a hurricane season, there apparently is also a season to try to shift insurance risks away from people who own property in hurricane-prone areas to property insurance buyers around the country.
Rep. Albio Sires (D-NJ) has reintroduced legislation establishing a federal bailout system for financially stressed state-run property insurance programs such as the Florida Hurricane Catastrophe Fund, which has $17 billion in liabilities and likely could not fully pay claims if a large hurricane were to strike the state.
The “beachhouse bailout” bill, as its critics call it, has appeared in several guises over the years. They call it a beachhouse bailout because expensive beachhouses are usually the first damaged where hurricanes land.
R Street Senior Fellow R. J. Lehmann says shifting liabilities from state-run insurance programs to the federal government would violate basic principles of insurance. Furthermore, he says, private reinsurance markets—which provide insurance to cover claims paid by primary insurance companies—can handle catastrophe risks at market-based, actuarially sound rates.
Support Not Needed
Federal catastrophe fund supporters claim they would require participating state-run insurance programs to charge actuarially sound rates, but Lehmann notes if state-run insurers were charging proper rates, they would not need a federal bailout.
“We’ve already seen what happens when the federal government gets involved in property insurance. The answer is the National Flood Insurance Program, which has $30 billion in debt it will never be able to repay,” Lehmann said.
The federal government created the NFIP after severe flooding on the Mississippi River and tributaries in the 1960s. As originally designed, the program was to be self-sustaining. But as the billions of dollars of NFIP debt show, it has come nowhere close to following that design.
Bill Would Prefund Losses
“This bill changes how we pay for natural catastrophes from an after-the-fact emergency appropriation system to a planned, controlled approach,” Sires said in a statement. “With the recent events of Superstorm Sandy, my state and my region in particular know the devastation these large-scale natural catastrophes bring to our citizens.”
He describes his bill as requiring private sector financing to build a fund that would have money on hand “to construct a backstop of accessible funds for when such devastating events occur. As a result, this legislation would drive down the cost of insuring all Americans, including those who live in areas with major catastrophe risk and encourage many more homeowners to be covered.”
Coalition Opposes Backstop
The SmarterSafer Coalition of insurance, environmental, and pro-market organizations opposes the bill.
“A federal backstop for disaster insurance replaces private-sector insurance with the American taxpayer,” said the Coalition in a statement. The Coalition said the bill would “encourage people to build and rebuild homes in hurricane-prone, environmentally sensitive areas by creating programs that subsidize homeowner’s insurance” and added, “the bill is designed primarily to subsidize expensive Florida beachfront homes at taxpayers’ expense.”
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
