Sometime before Memorial Day, the United States Senate will
consider several proposals to put taxpayers on the hook for
“national catastrophe insurance” liabilities that could easily top
$100 billion. The proposed legislation, intended mostly to reduce
soaring homeowners insurance premiums along the Atlantic seaboard,
would damage the environment while likely failing to keep
consumers’ insurance costs down. It’s a terrible idea.
Government-backed catastrophe insurance, also known as
“backstopping,” would transform the U.S. Treasury into the insurer
of last resort for nearly every disaster-prone home in the country.
Two proposals that have passed the House of Representatives would
expand an already troubled National Flood Insurance Program (NFIP)
to cover wind damage and allow the federal government to sell
reinsurance to private companies.
In either case, the federal government would set premiums and,
in return, provide policy holders and insurance companies with
coverage against certain events (hurricanes and perhaps
earthquakes) and specific levels of insurance claims. Following a
disaster, the government would pay insurers which, in turn, would
pay their policy holders.
Many private companies already sell reinsurance that works this
way, but proponents of the legislation argue that tax exemptions,
economies of scale, creditworthiness, and the implicit promise of a
bailout would let the feds charge less. Since lower prices would
reduce costs to insurers, proponents argue, savings would trickle
down to consumers. Because the programs could break even over time,
the theory goes, all this wouldn’t cost taxpayers a dime.
TO SEE WHY THIS wouldn’t work, one needs only to look at the flood
program that covers nearly all residential flood damage. Although
Congress intended NFIP to support itself, it regularly borrows
money from the U.S. Treasury (it currently owes almost $18
billion), charges prices that don’t cover its costs, and, as a
result, fails at its supposed objective of discouraging building in
flood-prone areas.
State-government sponsored reinsurance efforts have also failed
dismally. Florida’s existing hurricane catastrophe fund program
imposes a potentially crippling liability of around $30 billion on
the state’s taxpayers and hasn’t even reduced consumers’ rates.
Because private reinsurers already avoid most taxes and manage
their risks more broadly than the government could (they work
internationally while the government’s risk necessarily focuses on
the United States), a federal program probably can’t charge
sufficient rates and still deliver savings.
Instead, politicians would likely deliver rate cuts the same way
they have with flood insurance: by forcing the program to set
premiums below actual costs. Given that Florida’s program imposes a
$30 billion liability, a national program would probably put
taxpayers on the hook for $100 billion or more.
This implicit subsidy would make it practical for developers to
build in currently wild or lightly developed coastal areas where
conventional private companies won’t write policies. That’s why
groups like the National Wildlife Foundation, Friends of the Earth,
and Sierra Club have spoken out against it.
There’s no guarantee that most consumers would see rates go down
in any case: Most insurers actually filed for rate
increases after the state of Florida massively expanded
its own catastrophe fund program.
ALTHOUGH RISING homeowners insurance premiums are mostly a problem
for coastal states which should try to solve the problem
themselves, the federal government does have a role to play.
Efforts to end state setting of homeowners insurance rates — the
practice in 49 states — provide the best long-term solution.
Over time, risk-based insurance rates alone would force property
owners to either make their homes more disaster-resistant or move
out of dangerous areas. To facilitate the transition, however,
federal efforts should focus on programs that help people help
themselves through disaster mitigation. In addition, Congress might
even consider direct insurance premium assistance targeted towards
incumbent homeowners of modest means.
A massive new reinsurance subsidy program, however, will
endanger both the nation’s fiscal health and its environment. When
the Senators consider the misguided proposal for federal
reinsurance, they should do the smart thing — reject it.
