Miami Herald: Safety net needs funding

BY JAMES M. LOY
ProtectingAmerica.org

Aug. 31, 2009 — America has come a long way in improving our preparedness and response system since Hurricane Katrina devastated the Gulf Coast four years ago, but the job is not done and the American economy needs more protection.

When it comes to shoring up the financial infrastructure that stands behind homeowners, communities and insurers after catastrophe strikes, we are no better off than we were four years ago. Given the nation’s fragile economic condition, we may actually be worse off than we were four years ago.

We learned a lot from the failures in the response to Hurricane Katrina.

In short, the communications failures, the crossed signals, confused roles and responsibilities that turned a natural catastrophe into a national calamity have been identified and addressed.

Funding inadequate The greatest weakness in the improved safety net that America has crafted to respond to catastrophe is not in the human response mechanism, but rather in the financial system. The nation is exposed and vulnerable to enormous economic consequences unless we take steps now to prepare for the next major natural catastrophe.

What would that catastrophe be?

Perhaps a replay of the 1938 hurricane that slammed into Long Island, N.Y., joined the Atlantic Ocean with the Long Island Sound, left 63,000 people homeless and killed 700. Frighteningly, perhaps the next storm makes landfall 30 miles to the west.

In that case it would be known as the storm that demolished Manhattan, that put Kennedy Airport under 20 feet of water, flooded Manhattan from the Bowery to City Hall and turned the canyons between skyscrapers into supercharged wind tunnels.

Or maybe the next catastrophe would be a reprise of the New Madrid Earthquakes of 1811. But this time, instead of rocking the vast and largely unsettled wilderness of the Mississippi Valley and the American Heartland, the earthquakes would demolish some of our great middle-American cities like St. Louis, Memphis, Little Rock or even Chicago.

Many thousands could be killed, and insured losses would easily climb into the hundreds of billions of dollars in any major catastrophe; uninsured losses are harder to comprehend. The capacity of insurers and reinsurers to cover losses would quickly be exhausted, and their ability to remain standing afterwards is questionable at best. Recovery efforts would be delayed, regional economies would be in shambles and the national economy could be shocked like never before.

The federal government would do its best to meet pressing public needs. The federal coffers would be tapped, and the federal taxpayer would be taxed to unthinkable levels.

The current financial model for major catastrophe recovery, which is almost entirely an after-the-fact model, relies initially on insurers and reinsurers to cover the first level of losses, but ultimately relies on federal tax dollars to cover the rest.

This is an unfair system because it rewards risky choices, does nothing to incentivize prevention and mitigation efforts and finally drains the federal treasury of hard-earned tax dollars paid by working men and women in every state in the nation.

The massive taxpayer subsidies and the potential for the largest financial bailout in the nation’s history could be avoided if we take steps now to pre-fund for the major natural catastrophes we know are coming.

What is needed is a privately funded public partnership that helps to pre-fund the financial costs of a large-scale natural catastrophe. Such a program would facilitate the risk participation of the private sector, expand the availability and sustainability of the catastrophic insurance system, and provide potent incentives for residential property owners to undertake catastrophe loss mitigation efforts.

Public/private alliance This approach should add capacity, increase stability and lower consumer costs. From an economic perspective, such an alliance of public and private resources is the optimal manner to address the inefficiencies that plague the present system of federal disaster relief. This approach would stregthen America’s financial infrastrucure and protect the economy.

Legislation to accomplish these goals was approved by the House of Representatives in the last session of Congress and has been reintroduced. President Obama, while campaigning in Florida, wrote an op-ed column committing himself to enacting the program.

We can only hope that the president and the Congress come together quickly to put this plan into effect. We’ve been warned that the next catastrophe is coming. We need to act today.

Admiral James M. Loy was commandant of the U.S. Coast Guard and deputy secretary of the Department of Homeland Security under President Bush. He is co-chair of ProtectingAmerica.org.