• 

  News and Publications

  • Media Room
  • News: Federal
  • News: State
  • Publications
  • Subscriptions

• 

  Seminars and Services

  • Convention
  • Event Calendar
  • Services

• 

  Government Affairs

  • Advocacy
  • Compliance
  • Issue Resources
  • Legislative Reports
  • Public Policy
  • Political Action

• 

  About NAMIC

  • Membership
  • History
  • Member Directory
  • Employment
  • Affiliates
  • Contact

Read	E-mail Print

last updated on July 10, 2009

NATURAL CATASTROPHE

The high costs of recent natural disasters combined with the fear of future catastrophes have restricted homeowners' insurance, reduced availability, and raised affordability issues in disaster-prone regions.

NAMIC OPPOSES efforts to provide federal bailouts for state-sponsored insurance programs, which could create incentives for more states to create risky catastrophe plans similar to Florida, thereby increasing the federal government's financial exposure.

BACKGROUND

As the frequency of natural disasters rises, so increases the probability that a major catastrophe will strike the U.S. at a much higher cost than the reported $180 billion in insured losses and federal disaster relief as a result of the three 2005 hurricanes.

Simply put, the availability and affordability of property insurance in coastal regions is primarily a function of risk and higher property insurance prices in coastal areas have come in the wake of the recent storms. However, other variables, including actions taken by government, can also affect the supply and costs of insurance. Many states in catastrophe-prone coastal regions impose rating and underwriting restrictions on property insurers that act as price ceilings on coverage. This 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 of rising costs – 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 population in vulnerable areas, NAMIC created the 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:

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

In early 2009, the Florida Catastrophe Fund requested a line of credit from the Department of Treasury to shore up the fund since it would not be able to cover the amount for potential damages required by Florida state law. After the Treasury Department declined to issue a line of credit to the State Hurricane Catastrophe Fund in Florida earlier this year, Sen. Bill Nelson, D-Fla., introduced S. 505 to establish a consortium similar to that of a government sponsored enterprise that would give the Treasury Department authority to provide aid to any state that suffers a catastrophe. Additionally, S. 505 would create a National Homeowners Insurance Stabilization Program, providing loans to states after a catastrophe. This legislation is similar to S. 2310 which was introduced by Sen. Nelson in the 110th Congress.

Homeowners Defense Act

On May 21, 2009, Congressman Ron Klein, D-Fla., again introduced the Homeowners Defense Act, with several modifications from the 110th Congress. The Homeowners Defense Act was also introduced and subsequently passed in the House in the 110th Congress.

Rep. Klein’s bill establishes the National Catastrophe Risk Consortium for state sponsored insurance funds to voluntarily pool their catastrophic risk, then transfer that risk to the private markets through the use of catastrophe bonds and reinsurance contracts. The creation of underfunded state catastrophe funds that subsidize insurance premiums will do much to distort the insurance markets.

The legislation would also establish a debt guarantee program in the Treasury Department that would authorize the federal government to guarantee debt issued by eligible state programs to assist in the financial recovery from natural catastrophes. NAMIC has reservations about this provision because of the advantage given to investors by the implicit federal backing.

H.R. 83, introduced by Rep. Ginny Brown-Waite, R-Fla., was included as part of this legislation in the last Congress and is again included in the Homeowners Defense Act. It would establish a federal natural catastrophic reinsurance fund that would be authorized to write reinsurance contracts for catastrophic events, defined as a 1 in 200 year event. NAMIC has serious reservations about what this provision could potentially do to reinsurance markets.

NAMIC does support the final provision of the Homeowners Defense Act, providing for a $15 million a year grant program to develop, enhance, and maintain mitigation programs that prevent and mitigate losses from natural catastrophes. However, NAMIC believes the program should receive more funding because the current level would not be large enough to have a substantial impact on people’s behavior.

NAMIC was invited to testify at a July 2009 field hearing on natural catastrophe issues in West Palm Beach, Florida, and was the only insurance trade association to do so. Representing NAMIC was Dr. Robert Detlefsen, NAMIC’s Vice President of Public Policy. He spoke before the House Financial Services Oversight and Investigations Subcommittee, emphasizing the fact that government intervention cannot be an effective substitute for the economic principles affecting the complex relationship between supply, demand and price. Detlefsen also outlined federal proposals which NAMIC supports in an effort to establish a proper balance between the roles of the private insurance sector and governments and to discourage development and/or mitigate its effects in dangerous areas while addressing affordability issues for low-income people already living in areas prone to natural disasters.

The House Financial Services Subcommittee on Housing and Community Opportunity and Subcommittee on Capital Markets, Insurance, and Government Sponsored Entities also recently held a joint hearing entitled "Approaches to Mitigating and Managing Natural Catastrophe Risk." NAMIC submitted testimony, pulling from recent developments and displaying ways that states have started to manage their risk through making smart decisions at the state level. Many of these changes at the state level would not be incentivized if a federal backstop, such as the one that the Homeowners Defense Act would create, were in place.

CONTACT INFORMATION

For more information please contact Kathy Mitchell, federal affairs director, at (202) 580-6744 or kmitchell@namic.org.