National Insurance Program Criticized as Beach-House Bailout

Published March 30, 2010

Congress is considering a bill that proponents say would make property insurance more accessible and affordable and opponents say amounts to a “beach-house bailout.”

The U.S. House Financial Services Committee in March held a hearing on H.R. 2555, The Homeowners’ Defense Act, which would allow states to pool catastrophic insurance risks.

The bill was introduced by Rep. Ron Klein (D-FL) and has been cosponsored by 73 other members, both Democrats and Republicans. Its strongest support comes from Florida and California, the states that stand to benefit the most from passage.

Insurers’ Support
Organizations supporting the bill include the American Red Cross, International Association of Fire Chiefs, and Allstate and State Farm Insurance, the nation’s largest homeowners insurers.

The bill would create a National Catastrophe Risk Consortium, a quasigovernmental agency that would allow states to pool catastrophic risk. The bill would also create a debt guarantee program under which the federal government would guarantee $5 billion of state earthquake insurance programs and $20 billion of other state insurance programs.

Under the plan, insurance buyers in locales with a low risk of natural catastrophes would end up subsidizing those in high-risk areas, such as hurricane- and earthquake-prone areas of the Pacific, Atlantic, and Gulf Coasts.

Steve Ellis, vice president of Taxpayers for Common Sense, was the only witness to testify against the bill at the March 10 hearing. However, other individuals and groups, including environmental organizations, have publicly opposed the bill.

Environmental Concerns
In a letter to House Financial Services Committee Chairman Barney Frank (D-MA), environmental groups including the National Wildlife Federation, Audubon Society, and Sierra Club, wrote in opposition to the bill: “We have no doubt that Representative 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.”

Ellis testified the bill would make the development of high-risk and environmentally fragile coastal areas more attractive by lowering the cost of insuring homes in these places. It would also allow Florida to maintain and possibly expand Citizens Property and Casualty Insurance, its broken state-run insurer. In addition, said Ellis, there is no need for such a bill, given the availability of insurance and reinsurance in the private market.

The hearing’s other witnesses spoke in favor of the bill, testifying it would bring stability to the homeowners’ insurance market, lowering prices and generating additional capacity.

These witnesses were former Federal Emergency Management Agency Director James Lee Witt; Glenn Pomeroy, chief executive officer of the California Earthquake Authority; and Charles McMillan, former president of the National Association of Realtors.

Subsidizing Excessive Risk
In his written testimony, Witt argued American taxpayers “would be far better served by a program that uses private insurance dollars to prefund coverage for the eventuality of a catastrophic natural catastrophe.”

“They argue that taxpayers pay on the back end anyway,” Ellis said in a Heartland Institute podcast interview. “They’re right: Taxpayers do pay on the back end when there’s a natural disaster. But we’ll do that whether this program is in there or not, because this is still just about homeowners insurance. And homeowners insurance doesn’t rebuild the roads, doesn’t rebuild the levees, doesn’t rebuild critical infrastructure, doesn’t pay for debris removal, doesn’t deal with emergency services. So there’s going to be huge federal and local costs regardless of whether this legislation goes through.

“Disaster relief is something—good, bad, or indifferent—the federal government has been engaged in and is likely to continue to be engaged in,” said Ellis. “We’re a bighearted people, so when we see somebody suffering we want to step in and help. We can be still bighearted, but we can’t be softheaded, and certainly not create programs that are actually going to subsidize people to live in harm’s way.”

Arin Greenwood ([email protected]) is a writer and lawyer in Alexandria, Virginia.