Reinsurers Blast Federal Disaster Backup Plan Advancing in Congress

November 12, 2007

The nation’s reinsurance industry is criticizing Congressional natural disaster legislation as raising false hopes about addressing the homeowners insurance market in areas prone to hurricanes, at the expense of U.S. taxpayers and disenfranchising the private marketplace.

The proposals under fire seek to create a federal catastrophe fund as a means to make homeowner’s insurance more affordable and available.

But reinsurers say the measures are bad for homeowners in areas with low catastrophe risk and bad for private insurance markets.

"Government is not the right solution. The capital markets and the insurance/reinsurance industry have demonstrated their ability to meet natural catastrophe risk transfer needs of insurers and consumers when market dynamics are allowed to work. This legislation will do nothing more than disrupt the marketplace," said Franklin W. Nutter, president of the Reinsurance Association of America (RAA).

H.R. 3355, "The Homeowners Defense Act of 2007," passed the House on November 8; "The Homeowners Defense Act of 2007," was introduced in the Senate on November 7 by Senators Clinton, D-N.Y., and Nelson, D-Fla., and virtually mimics the House version.

"These bills are based on the false premise that a federal role in homeowner’s insurance is necessary because natural disaster risks occur throughout the country," said Nutter. "What these bills ignore is that homeowners in each part of the country pay insurance premiums based on their local risk, not risk to natural catastrophes in other parts of the country," he continued.

"Why should homeowners/taxpayers in non-coastal states subsidize homeowners and developers in Florida or other coastal states? Insurance consumers should pay premiums based on their own risk, not the risk others have chosen to take. Contrary to what the proponents argue, this legislation will not replace federal disaster assistance that is spent largely on public infrastructure and immediate assistance, not homeowners’ losses," said Nutter.

The proponents of both bills, including ProtectingAmerica.org, argue that the catastrophe insurance market is "in crisis," and that creating a federal program to provide for low-interest loans to any state reinsurance fund facing a financial shortfall following a natural disaster will stabilize it.

But Nutter argues that the approach is flawed.

"State insurance programs, like those in Florida, that encourage states to replace or compete with the private sector by under-pricing catastrophe risk and subsidizing it by assessing low or even ‘no risk’ consumers, turn sound risk management on its head. Under the House-passed measure, consumers who do not live in catastrophe-prone coastal areas will bear the price of this flawed legislation," he maintained.

He called HR 3355, and its companion bill in the Senate, "Trojan horses for those who seek to subsidize coastal development by assessing taxpayers and those with little or no coastal catastrophe risk."