Treasury Knocks Catastrophe Funding Bill

WASHINGTON–A Treasury Department official testified today that legislation creating a joint federal-state program supporting programs providing homeowner catastrophe insurance would have a negative impact on business and taxpayers.

The proposed measure would displace private markets, promote riskier behavior, and be costly as well as “unfair to taxpayers,” said Phillip Swagel, Treasury's assistant secretary for economic policy at a hearing before two subcommittees of the House Financial Services Committee.

Also voicing concern about the legislation was Frank Nutter, president of the Reinsurance Association of America, who said it would “unnecessarily crowd out the private reinsurance market.”

While the RAA does not support this legislation, and has significant concerns with provisions of it, Mr. Nutter said the group does agree “with some of the principles in the legislation and pledges to work with the committee to improve it as it moves through the legislative process.”

The Property Casualty Insurers Association of America voiced measured support. Robert Joyce, chairman and chief executive officer of Ohio-based Westfield Group, testified that the legislation “creates a good starting point for a discussion of how to stabilize catastrophe-prone markets.”

And a representative of the Independent Insurance Agents & Brokers of America said the issue of catastrophic insurance “is a national problem that requires a national solution.”

But Steven Spiro, president of Spiro Risk Management Inc., an independent insurance agency based in Valley Stream, N.Y., said “it is important that the day-to-day regulation of insurance remain at the state level, where state insurance departments are best equipped to serve the special needs of local consumers in local markets.”

According to Westfield Group's Mr. Joyce, “one of the most promising aspects of the bill” is a provision to create a federal liquidity facility to provide financial support for qualified state catastrophe funds.

“The liquidity facility proposed in the bill has considerable merit and could play an instrumental role in a long-term solution to America's natural disaster problem,” Mr. Joyce said. “We look forward to working with the sponsors and the committee to refine this proposal so that it best serves consumers and taxpayers,” he added.

The legislation, H.R. 3355, the Homeowners' Defense Act of 2007, would provide a federal backstop for qualifying state-sponsored insurance programs that provide natural catastrophe coverage for homeowners.

Implementation of the federal backstop would be accomplished through a National Catastrophe Risk Consortium and a program to provide liquidity loans and catastrophe loans to state and regional reinsurance programs.

The hearing was held before the Capital Markets and Housing and Community Opportunity Subcommittees of the House Financial Services Committee.

In his testimony, Mr. Swagel of Treasury argued that the private insurance markets for natural hazard insurance “are active and effective.”

He said experiences with catastrophes in 2004 and 2005 led insurance companies to increase their estimates of probable losses from future hurricanes. “As a result, insurers obtained state regulatory approval and increased their premiums to cover future losses and enhance solvency.”

“Certain coastal areas have experienced increases in rates,” Mr. Swagel said. “This can be difficult for homeowners, but is fundamentally a reflection of the cost of risk, not a defect of the market.”

“While certain coastal areas have seen reduced availability of private insurance as well, these shortages generally can be traced to state regulatory actions,” he added.

Mr. Nutter made the same point, noting in his testimony that “it is important for the committee to understand that, not withstanding the extraordinary losses from natural catastrophes in 2004 and 2005, the private insurance and reinsurance sector proved exceptionally resilient.”

The concern of the reinsurance industry, he said, is that H.R. 3355 will lead to creation of more programs like Florida's, which “turns sound risk management on its head” by underpricing catastrophe risk.

“A major concern the RAA has with H.R. 3355 is that it appears to provide incentives for the creation of more such state catastrophe reinsurance programs,” Mr. Nutter said.

Mr. Joyce representing PCI said the trade group supports the liquidity provisions in the legislation because they would offer solvency protection to state catastrophe funds in order to stabilize markets.

But, Mr. Joyce added, “any federal program must be carefully structured so that it does not mask the true cost of insuring against catastrophes, encourage reckless development in high-risk areas, or hinder the flow of new private capital to the market.”