CBO: High Price Tag on Beach House Bailout

Published June 21, 2010

A federal bill critics have dubbed the “Beach House Bailout” has been scored by the Congressional Budget Office as costing the nation’s taxpayers an estimated $1.7 billion over the 2011-2015 time period.

“The CBO’s score shows that even under the best of circumstances the Beach House Bailout will costs the taxpayers almost $2 billion over the next five years,” said Matt Brady, a spokesman for the National Association of Mutual Insurance Companies. “If we have an active storm season, as NOAA has predicted, the cost could be far worse.”

The bill is formally known as the Homeowners’ Defense Act, H.R. 2555. Its chief sponsor is Rep. Ron Klein (D-FL).

Debt Guarantees, Catastrophe Fund
According to the CBO’s evaluation of H.R. 2555, estimated costs over the next five years include $115 million for a debt guarantee program, and $347 million for hazard mitigation grants and the establishment of a National Catastrophic Risk Consortium.

The most expensive provision of H.R. 2555 would be the National Catastrophe Reinsurance Fund, a federal backstop for state-sponsored nonprofit catastrophe insurers and reinsurers.

In 2012, the first full year the fund would be in effect, “eligible entities would seek about $7 billion in reinsurance coverage from the proposed federal reinsurance fund,” with the same amount sought in future years, according to the CBO report.

$270 Million for Reinsurance
The CBO estimates the expected cost of the reinsurance coverage alone will average about $270 million per year during 2012-2015. Federal reinsurance would be priced below reinsurance in the private market, the CBO estimates in its report, and reinsurance claims would exceed premiums by $1.2 billion in the program’s first five years, “resulting in net outlays from the National Catastrophe Reinsurance Fund of that amount.”

The CBO found a handful of existing state programs would be eligible to buy reinsurance or obtain debt guarantees under this fund. These programs include Florida’s Hurricane Catastrophe Fund, the California Earthquake Authority, and the Texas Windstorm Insurance Association.

Other states may create or expand eligible programs—thus, say critics, increasing taxpayer liability and doing environmental harm by subsidizing development in wetlands and other fragile ecosystems by keeping property insurance rates artificially low in these areas.

Broad Coalition Against Bill
Some of these critiques were highlighted in a June 8, 2010 letter to all House offices by the Smarter Safer coalition, an odd-bedfellow group of opponents to H.R. 2555. Members include environmental groups such as the National Wildlife Federation and the Sierra Club, taxpayer watchdog organizations such as Americans for Tax Reform, and insurance industry entities such as Liberty Mutual Insurance, the Association of Bermuda Insurers and Reinsurers, and the National Association of Mutual Insurance Companies.

They said in a statement:

“Subsidizing insurance premiums in at-risk areas, as contemplated in H.R. 2555, encourages development in areas subject to hurricanes, putting people at increased risk for loss of life and property. These coastal areas actually provide natural barriers to storm surge, helping to protect Americans. The federal government should not be using taxpayer dollars to encourage development in risky and environmentally sensitive areas, putting Americans at greater risk.”

The National Association of Mutual Insurance Companies’ Matt Brady put the coalition’s objections more bluntly, saying, “This bill is a financial disaster waiting to happen for the taxpayers and the federal budget. [It] would simply pass the buck to the American taxpayer while undermining the private market for reinsurance and encouraging even more development in environmentally sensitive coastal areas.”

H.R. 2555 was reported out of the House Financial Services Committee on April 27 and has not yet been scheduled for a vote on the House floor.

Arin Greenwood ([email protected]) writes from Alexandria, Virginia.