National Catastrophe Insurance Program

Published June 19, 2008

Concerned about affordable homeowners’ coverage in coastal areas, the national government currently is considering proposals to expand the its role in coastal insurance. One of these proposals is the National Catastrophe Insurance Program (NCIP), a “multi-layered” approach that aims to ensure capacity at reasonable price. The NCIP was introduced by U.S. Representatives Ginny Brown-Waite and Vern Buchanan of Florida in early 2007, in their “Homeowners’ Insurance Protection Act of 2007.”

In 2007, the U.S. Census Bureau estimated that 35.3 million people live in hurricane-prone coastal areas stretching from North Carolina to Texas. The NCIP would encourage people to ignore important market signals and the real risks of living in the path of danger.

NCIP is intended to allow private insurers to maintain and service property and casualty policies while also giving those insurers access to local, state, and federal tax dollars without creating a large bureaucracy. However, the proposed NCIP comes with significant risk. It would create a taxpayer liability exceeding $100 billion, and would further erode an already flagging private wind insurance market.

The proposal is modeled after the National Flood Insurance Program (NFIP), designed to keep affordable the insurance premiums paid by homeowners in flood-prone areas. NFIP has yet to achieve its goal of discouraging homebuilding in flood-prone areas. Although intended to be self-sustaining, NFIP has repeatedly needed to borrow money from the U.S. Treasury to remain solvent.

Providing wind (hurricane) coverage in coastal areas is often prohibitively expensive for insurers and the insured. These high prices are an important market signal to prospective and current property owners about the dangers of living in hurricane-prone areas. The market signal of a high property insurance premium is the first line of defense in disaster preparedness, telling property owners to consider the risks of hurricanes.

The proposed NCIP, and existing state-run “insurers of last resort” programs, help disguise these important signals of risk. In fact, the majority of wind policies have already shifted to state-run “insurers of last resort.” These state-run insurance providers rely heavily on government-run reinsurance programs, known as “catastrophe funds,” to keep premiums low and act as a backstop for companies overburdened by claims after major storms.

Policies issued by state-run insurance companies like Florida’s Citizens Property Insurance Corporation (CPIC) represent significant unfunded liabilities on the states. These liabilities create the potential for fiscal collapse in the event of a significant storm, necessitating tax increases or service cuts to cover costs.

The following articles address some of these concerns and examine the national catastrophe fund debate from a free-market perspective.

National Catastrophe Insurance Program: A Framework for Discussion
This Framework for Discussion, published by the Florida Office of Insurance Regulation, explains the rationale and design of the National Catastrophe Insurance Program (NCIP). It describes the three levels of the program: community, state, and national components.

Coastal Disaster Insurance in the Era of Global Warming
Justin R. Pidot of the Georgetown Environmental Law & Policy Institute at Georgetown University examines the proposals before Congress for an expanded role in providing insurance to property owners threatened by hurricanes and other coastal storms. Pidot concludes many of the current proposals are misguided and the government should “stay out of the insurance business and allow private companies to provide disaster coverage that reflects its true market cost.”

Insurance Information Institute Issues Updates: Reinsurance
This Issue Update provides background on reinsurance, examining several recent developments at both the state and national levels. It also examines national catastrophe fund proposals.

Restoring Florida’s Insurance Market
Eli Lehrer, senior fellow at the Competitive Enterprise Institute, The Heartland Institute, and James Madison Institute, examines Florida’s property and casualty insurance market, making suggestions on how to improve the competitive environment. This piece includes a section devoted to national catastrophe insurance proposals.

War brewing over insurance coverage: Some execs see relief but critics say a catastrophe fund will hurt insurers’ ability to raise rates
Shaheen Pasha examines the debate over the NCIP, giving an overview of the positions held on each side of the argument: the case for a national pool, and critics’ warnings against subsidization of coastal homeowners.

Ensuring Disaster
Eli Lehrer writes in the American Spectator about the inherent risks of NCIP, using the deficiencies of the National Flood Insurance Program (NFIP) as a model. Given NCIP’s similarities to NFIP, the experiences of NFIP provide a good case study for the success of national reinsurance programs.

Facing Mother Nature
Martin F. Grace and Robert W. Klein examine the current trend toward attacking insurers for high property and casualty rates, instead of working with insurers to find the root causes of high rates.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and PolicyBot, Heartland’s free online research database.

If you have any questions about this issue or The Heartland Institute, you may contact Legislative Specialist Matthew Glans at 312/377-4000 or [email protected].