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last updated on March 13, 2008

NATURAL DISASTER

THE ISSUE IS…The high costs of recent natural disasters combined with the fear of future catastrophes have restricted homeowners’ insurance availability and raised affordability issues in disaster-prone regions.

IT’S IMPORTANT BECAUSE…There are hurricanes along the Atlantic and Gulf coasts, tornadoes are prevalent in the Midwestern states, the western and northwestern states experience earthquakes, and flooding occurs throughout the United States. As the frequency of natural disasters rises, so increases the probability that a major catastrophe will strike the U.S. that will cost much more than the reported $180 billion in insured losses and federal disaster relief after the three 2005 hurricanes. Multi-billion-dollar disasters, such as the 2005 Gulf Coast hurricanes demonstrate that insurance companies could become insolvent if overly concentrated in disaster-prone areas. Whether because of global warming or cyclical change, a consensus has emerged that the frequency and severity of major storms will increase during the next several years.

Higher property insurance prices in coastal areas have come in the wake of the 2005 storms. Simply put, the availability and affordability of property insurance in coastal regions is mainly a function of risk. However, other variables, including actions taken by government, can also affect the supply and cost of insurance. Many states in catastrophe-prone coastal regions impose rating and underwriting restrictions on property insurers that act as price ceilings on coverage. Government rate suppression, which allows high-risk property owners to pay artificially low premiums, is the preferred solution of many regulators and state legislators to the property insurance “affordability problem” in catastrophe-prone areas. But rate suppression masks the real problem—the growing concentration of people and wealth in high-risk regions—by forcing insurance buyers in low-risk regions to pay inflated prices in order to subsidize the insurance costs of those in high-risk regions.

In response to the increase in natural disasters, combined with the continued concentration of the country’s population in areas vulnerable to natural disasters, NAMIC created a Task Force on Natural Disasters. The Task Force played a leading role in the development of solutions that address the issues associated with major catastrophic events such as hurricanes, earthquakes, windstorms, tornadoes, and wildfires. The Task Force formulated four general principles that serve to guide NAMIC members and staff as the natural disaster debate evolves.

The principles are:

1. Market freedom and competitive pricing will lead to innovation in developing solutions to problems relating to disaster insurance and mitigation.
2. Competitive pricing and risk-based underwriting are essential to developing and maintaining a viable disaster insurance market.
3. Mitigation must be an indispensable aspect of any disaster risk management and insurance initiatives.
4. The National Flood Insurance Program should be maintained, but must be reformed.

In April 2007, NAMIC President and CEO Charles M. Chamness testified before the Senate Committee on Banking, Housing, and Urban Affairs at a hearing examining the availability and affordability of property/casualty insurance in the coastal regions. In addition to laying out the NAMIC statement of principles created by the Natural Disaster Task Force, Chamness stated that the most effective mechanism for addressing the challenges is a private insurance market whose defining characteristics are open competition and pricing freedom.

NAMIC POSITION…NAMIC believes that exposures to natural disasters create tremendous challenges in the years ahead for those individuals residing, as well as companies writing business, in catastrophe-prone areas. Congress can play a constructive role by reforming the National Flood Insurance Program, offering tax incentives for companies and homeowners to reserve funds for future disasters, and providing incentives for states to enact and enforce effective statewide building codes.

Legislative Activity

Since Congress convened the 110th Congress in January 2007, there has been a flurry of activity on Capitol Hill regarding the natural disaster debate, which will continue in 2008. On the last day before the August recess, Florida Democratic Reps. Ron Klein and Tim Mahoney introduced H.R. 3355, the Homeowners Defense Act of 2007. Similar legislation, S. 2310, was introduced by Senators Hilary Clinton, D-N.Y. and Bill Nelson, D-Fla.

H.R. 3355 would provide federal support for state-sponsored insurance programs to: (1) help homeowners prepare for and recover from damages caused by natural catastrophes; and (2) promote the use of private market capital as a means to insure against such catastrophes. The legislation also included language from Rep. Ginny Brown-Waite, R-Fla., that would allow states that participate in the fund to purchase reinsurance through a national catastrophe fund, which only would pay in a one-in-200-year event. The bill passed the House in November by a vote of 258-155.

President George W. Bush has expressed his opposition to this legislation, stating that it could potentially add more federal taxpayer liability. In addition, the Senate Banking Committee has shown little interest in pursuing H.R. 3355 or S. 2310. However, Senate Banking Committee staff members have indicated that they will hold hearings this year to address natural disaster solutions and that all proposals will be considered.

NAMIC does not support H.R. 3355, the Klein-Mahoney legislation because the legislation is not consistent with the NAMIC Natural Disaster Statement of Principles. NAMIC believes that the legislation would incentivize more states to create risky catastrophe plans similar to Florida, increasing the federal government’s financial exposure. NAMIC and the Natural Disaster Task Force will continue to study how to best address natural disasters and the issue of mega catastrophes.

Several other pieces of legislation have been introduced, which NAMIC supports:

S. 927, the Catastrophe Savings Accounts Act of 2007, which was introduced by Sen. Bill Nelson, D-Fla., and the House companion bill, H.R. 1787, introduced by Rep. Tom Feeney, R-Fla. This legislation would allow homeowners to create tax-free catastrophe savings accounts, similar to health savings accounts, which could be used to pay hurricane deductibles and the costs of retrofitting properties.

S. 926, the Policyholder Disaster Protection Act of 2007, introduced by Sen. Bill Nelson, D-Fla., and the House companion bill, H.R. 164, introduced by Rep. Bobby Jindal, R-La. The legislation would amend the federal tax code to allow insurers to set aside a portion of premium income in tax-exempt policyholder disaster protection funds.

NAMIC also supports three bills introduced by Senate Banking Committee Chairman Chris Dodd, D-Conn.

• S. 2286, the Commission on Natural Catastrophe Risk Management and Insurance Act of 2007, would establish a bi-partisan commission to examine the risks and recommend possible solutions for Americans living in natural disaster-prone areas. NAMIC worked very closely with Chairman Dodd in crafting this legislation and was pleased that it passed the Banking Committee with strong bi-partisan support. It is pending before the full Senate.
• S. 2327, the Homeowners Insurance Assistance Act of 2007, would provide tax credits to homeowners to offset the cost of their premiums. The program would provide a one-time tax credit of up to 50 percent of a policyholder's increase that is more than the national average. The credit could not exceed $250.
• S. 2328, the Property Mitigation Assistance Act of 2007, which was introduced by Senate Majority Leader Harry Reid, D-Nev., for Chairman Dodd while he was campaigning for the Democratic nomination for president, would provide $200 million in annual funding to states for mitigation assistance - such as elevating at-risk properties, installing storm shutters and constructing safe rooms.