Officials Continue Push For National Disaster Relief; Some Insurers Stand Opposed
Legislation to establish a comprehensive, national insurance fund to help pay claims from another major hurricane, earthquake or other catastrophe has drawn ample praise from Realtors, consumer advocates and state officials. Nevertheless, the Washington Post reports some insurers remain highly skeptical.
At a House Financial Services subcommittee hearing, Florida Insurance Commissioner Kevin McCarty lobbied for the federal fund, saying it would bolster state catastrophic insurance funds and provide needed capital to keep insurers afloat and stabilize the Florida housing market. The Sunshine State is reeling from recent hurricanes and concerned that another Katrina-like storm could cripple the industry financially.
“The prospect of mega catastrophes — i.e. the big one (earthquake) hitting California, a category 3 or 4 hurricane hitting New York, the New Madrid Fault leveling the Midwest — create risks that could simply destroy an insurance company or potentially the entire industry,” McCarty said.
McCarty added that a federal backstop, funded from policyholder premiums based on local risks and with incentives to better building standards and emergency preparedness, could help avoid devastation to the Florida and U.S. economies. State officials have been doing everything in their power to prevent this year’s hurricane season from wreaking financial havoc.
A bill proposed by Reps. Virginia Brown-Waite and Clay Shaw, both Florida Republicans, would create the Consumer Hurricane and Earthquake Protection Fund, providing lower-cost reinsurance to state catastrophic insurance funds, thus reducing the cost of homeowners insurance across the U.S.
Brown-Waite, a member of the panel’s housing subcommittee, said that high Florida property insurance costs were becoming a significant problem for the state’s homeowners, many of whom are now paying higher insurance premiums than their yearly property taxes. Combined with the rising borrowing costs of Florida home loans, the state is on the verge of a widespread affordable housing crisis.
A repeat of the 1938 “Long Island Express” hurricane would possibly result in damages of $100 billion in the area east of New York City, while another San Francisco earthquake on the scale of 1906 could result in more than $400 billion in reconstruction costs, according to James Loy, a retired admiral and co-chairman of ProtectingAmerica.org, an emergency preparedness advocacy group.
But insurance officials say the industry has coped well with the massive costs of Hurricanes Katrina and Rita and other devastating storms. They cautioned against creating another federal program along the lines of the National Flood Insurance Program, saying non-flood disaster insurance is better handled by the private sector as long as it is priced according to real risks of coastal exposure.
On Tuesday, the House of Representatives passed legislation to bolster the heavily indebted flood program, raising borrowing capacity to $25 billion from $20.8 billion and requiring the nation’s flood maps, which determine where homeowners must purchase such insurance, be redrawn.
But many insurers are not swayed. The President of the American Insurance Association, Marc Racicot, takes issue with the premise that insuring a large-scale natural catastrophe is beyond the capability of the private sector.
“It is important to recognize that new government programs are no panacea for natural catastrophe risk and that such programs can encourage and lead to inefficient allocation of capital, unfair subsidization and increased and unwise building in catastrophe prone regions,” Racicot said, noting that even since Katrina hit the Gulf Coast in August 2005, about $28 billion in new capital has entered the insurance market.
