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last updated on July 10, 2009

NATURAL CATASTROPHE

THE ISSUE

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.

IT IS IMPORTANT BECAUSE

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 as a result of the three 2005 hurricanes.

Higher property insurance prices in coastal areas have come in the wake of recent 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 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. 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.

On January 6, 2009, Rep. Brown-Waite, R-Fla., introduced HR 83, the Homeowners Insurance Protection Act. This legislation would provide a federal insurance catastrophic fund as a federal backstop for future natural disasters. This legislation is similar to previous iterations and was ultimately included in the Homeowners Defense Act in the 110th Congress. HR 83 has been referred to the House Financial Services Committee, on which Rep Brown-Waite currently serves.

In early 2009, the Florida Catastrophe Fund requested a line of credit from the Department of Treasury to back up the fund since it would not be able to cover the potential damages amount 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, Senator Nelson, D-Fla., introduced S 505, legislation that would 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 that was introduced by Senator Nelson, D-Fla., in the 110th Congress.

On May 21, 2009, Congressman Ron Klein, D-Fla., again introduced the Homeowners Defense Act, with several modifications from the 110th Congress.

On July 2, 2009, a field hearing titled “The Homeowners Insurance Crisis: Solutions for Homeowners, Communities, and Taxpayers” was held in West Palm Beach, Florida. NAMIC was invited to testify 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 Oversight and Investigations Subcommittee of the House Financial Services Committee, emphasizing the fact that we should not delude ourselves into thinking that government intervention can be an effective substitute for the economic principles affecting the complex relationship between supply, demand, and price. Furthermore, he pointed out the true underlying nature of the coastal insurance problem in the United States and outlined federal proposals which NAMIC supports in an effort to establish a proper balance between the roles of the private insurance sector and governments, in order to send the proper signals 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 proposed legislation establishes the National Catastrophe Risk Consortium for state sponsored insurance funds to voluntarily pool their catastrophic risk, then transferring that risk to the private markets through the use of catastrophe bonds and reinsurance contracts. There is concern that the creation of underfunded state catastrophe funds that subsidize insurance premiums undercuts the free market principles endorsed by NAMIC.

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 for reasons stated in the analysis of the Senate legislation authorizing this very program, S 886.

HR 83, introduced by Congresswoman 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 this provision for reasons stated in the analysis of the stand alone legislation.

NAMIC supports 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 attention because the current funding level would not be large enough to have a substantial impact on people’s behavior.

LEGISLATIVE HISTORY

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:

• 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 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 Task Force on Natural Disasters, Chamness stated that the most effective mechanism for addressing the challenges is a private insurance market defined by the characteristics of open competition and pricing freedom.

HOMEOWNERS DEFENSE ACT

In August 2007, Florida Democratic Representatives Ron Klein and Tim Mahoney introduced H.R. 3355, the Homeowners Defense Act of 2007. Similar legislation, S. 2310, was introduced by Sens. Hilary Clinton, D-N.Y., and Bill Nelson, D-Fla.

H.R. 3355 would have provided 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 have allowed 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 2007 by a vote of 258-155.

While NAMIC is encouraged that members of Congress worked during the 110th Congress to develop a comprehensive natural disaster plan to address concerns about coastal insurance affordability and availability, there are concerns that this legislation would have expanded the federal government's role to a point that the private insurance market could be crowded out. It could also have encouraged unwise residential and commercial development in high-risk coastal regions, such as the Atlantic and Gulf coasts of Florida.

House and Senate hearings were held during the 110th Congress to further analyze all natural disaster solutions. While the bill successfully passed the House, there was little interest from the Senate Banking Committee and the legislation did not move forward in the Senate.

DODD COMMISSION

During the 110th Congress, Chairman Dodd, D- Conn., introduced S 2286, the commission on Natural Catastrophe Risk Management and Insurance Act. This legislation would have established 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 and his staff to craft legislation and was pleased that it passed the Senate Banking Committee with strong bi-partisan support. It did not receive consideration before the full Senate during the 110th Congress.

NAMIC POSITION

NAMIC believes efforts to provide federal support for state-sponsored insurance programs would create incentives for more states to create risky catastrophe plans similar to Florida, increasing the federal government's financial exposure.

CONTACT INFORMATION

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