Waste, Fraud, Abuse Likely to Flood Federal Hurricane Fund

Published June 1, 2009

Efforts to create a federal Catastrophic Hurricane Fund are finding an all-too-eager audience in Congress, setting the stage for “the entire baggage of waste, fraud, and abuse” that typically accompanies poorly thought-out federal programs, new research from The Heritage Foundation concludes.

What started out as a focused fund to cover hurricane damage, the study’s authors write, is attracting the attention of others who would add earthquake and other disaster coverage as well.

“No matter what is covered,” the authors warn, “a catastrophic hurricane fund would federalize even more of America’s natural disaster response, and spread the risks willingly accepted by a minority of taxpayers to a majority of taxpayers who live far away from routine hurricane and earthquake activity.”

What’s lost in the debate, they note, “is the inconvenient fact that Hurricane Katrina—the most expensive natural disaster in American history—did not bankrupt the insurance industry. Unlike the current Wall Street financial crisis, the industry did not even require a federal bailout.”

Principles for Reform

Instead of second-guessing what the authors call the “collective wisdom of the private sector,” the Heritage study sets forth five principles to guide reform in catastrophic natural disaster insurance.

* Catastrophic should mean nationally catastrophic. “Defining disaster down” so even disasters within a small, confined geographic area qualified for federal relief gave states and localities “an incentive to reduce their own investment in disaster response capabilities.” “Accountability needs to be returned to the governors and the people,” the authors argue.

* Those who assume risk should bear the risk. “States need to eliminate arbitrary rate caps on property and casualty insurance so that the insured parties pay fully for the risk of their actions, thereby allowing insurance companies to acquire capital reserves sufficient to deal with” disasters.

* State eligibility reform. The authors argue that to be eligible for any catastrophic natural disaster program, a state should meet five requirements: no rate caps, thus encouraging actuarially sound insurance; building codes that minimize damage; prohibition of redevelopment of disaster-prone areas; tort reform to combat “frivolous lawsuits” that typically follow a natural disaster; and mandated property and casualty insurance in known disaster areas.

* State participation should be opt-in only. Forcing states that don’t face predictable catastrophic risk into a disaster program “is inherently unfair and violates U.S. federalist principles,” the authors write.

* Federal tax reform. Congress should amend existing tax laws that prevent insurers from taking tax deductions for capital reserves.

“Underpinning these principles is the belief that the private sector, state governments, and as a last resort, the federal government … could provide greater stability to the insurance market at a lower cost to most taxpayers,” the study asserts.

Government Encouraging Risk

The authors conclude, “The U.S. has thrived for 223 years without a federal [catastrophic hurricane fund]. Other than irresponsible government action, a lack of leadership and accountability, and a federally incented policy of ignoring risk, nothing is preventing states from freeing insurance companies to charge actuarially sound P&C insurance rates and citizens from bearing the costs of the risks they assume. Nothing but politics, that is.”

Dan Miller ([email protected]) is executive vice president and publisher at The Heartland Institute.

For more information …

“Principles for Reform of Catastrophic Natural Disaster Insurance,” by Matt A. Mayer, a visiting fellow at Heritage and CEO of insurance consultancy Provisum Strategies, and Heritage senior research fellows David C. John and James Jay Carafano: http://www.heritage.org/Research/HomelandSecurity/bg2256.cfm