Research & Commentary: National Catastrophe ‘Backstop’ Update

Published February 22, 2012

For more than a decade, members of Congress have proposed various bills to establish a federal “backstop,” “catastrophe fund,” or “guarantee mechanism” for private losses in cases of disaster. Most recently, several members of Congress from California, including Sen. Dianne Feinstein (D-CA), Sen. Barbara Boxer (D-CA), and Rep. John Campbell (R-CA), announced another iteration: federal backing for the privately financed but publicly run California Earthquake Authority (CEA), the state’s dominant seller of earthquake insurance. The bill doesn’t specify CEA by name, but no other state has an entity that would qualify.

Proponents say the legislation would allow CEA to cut its premiums and thus increase the number of people with quake insurance, at little or no cost to federal taxpayers. With more people buying earthquake insurance, they say, the federal government will achieve a reduction in disaster assistance dollars provided after an earthquake.

Opponents of the federal earthquake backstop say it would displace private companies and put much of the financial burden for a major earthquake on taxpayers because, instead of spreading risk around the world as is currently the case, a backstop would concentrate risk in the United States. This would make insurance more expensive than what is provided in the private sector. In addition, opponents say the measure would undermine CEA’s currently stable structure. Finally, they argue against making laws that benefit one state alone; proponents of the legislation say other states with relatively high earthquake risks—such as Alaska, Missouri, Nevada, and Tennessee—would create entities like the CEA.

Other congressional proposals, including the Homeowners Defense Act by Rep. Ron Klein (D-FL), would extend similar federal backing to entities such as the Florida Hurricane Catastrophe Fund.

The following documents provide more information on proposals for a national catastrophe backstop.

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

A Beverly Hills Bailout? Federal Earthquake Insurance is an Awful Idea
Writing in the Weekly Standard, Heartland Institute Vice President Eli Lehrer harshly criticizes Rep. John Campbell’s (R-CA) House companion bill to the Senate’s Earthquake Insurance Affordability Act. Campbell’s bill (H.R. 3125) would put all federal taxpayers on the hook for billions of dollars in potential future losses sustained by the California Earthquake Authority, Lehrer writes.

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

The Beach House Bailout
Eli Lehrer writes in the Weekly Standard about the Homeowners’ Defense Act. Lehrer criticizes the proposal, which is intended to reduce homeowners’ insurance premiums but in fact turns the federal government into the insurer of last resort for many of the most disaster-prone homes in the nation. With the great bulk of the bill’s potential beneficiaries and current advocates living on or near hurricane-prone beaches, it’s quite fair to think of the bill as a bailout for them—a beach house bailout, he writes.

Tsunamis and Earthquakes: Is Federal Disaster Insurance in Our Future?
This Congressional Research Service Report for Congress by Rawle O. King examines the current disaster insurance system and questions whether federal disaster insurance is necessary.

Final Thoughts from the Seismic Risk Leadership Forum
Writing in Out of the Storm News, Eli Lehrer discusses the importance of damage mitigation efforts and the need for the entire insurance system to support mitigation reform.

Should Society Deal with the Earthquake Problem?
The Cato Institute’s Regulation magazine examines possible roles for government in responding to the potential for damages from earthquakes.

Catastrophe Insurance, Dynamic Premium Strategies, and the Market for Capital
Thomas Russell of Santa Clara University and Dwight Jaffee of the University of California-Berkeley examine insurability of catastrophe risk, with a special focus on earthquake risks in California.

Industry to Congress: Private Market is the Best Solution on Natural Disasters, But Some Say Federal Help Needed
This letter from insurance industry leaders to Congress argues the private insurance marketplace, not the federal government, is the best vehicle to address coastal insurance and natural disasters. Some insurers, however, argue the federal government has a role in promoting insurance affordability and availability in coastal areas.