U.S. Backstop For State CAT Funds Gets Panel Okay

He said Association's more than 350 member companies do not want to see Congress "go down the road of providing incentives that would create more state mechanisms "that would interfere with the private market."

The Homeowners Defense Act of 2007, also known as H.R. 3355, was introduced by Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla.

Their bill would establish a federal-state consortium that states could join to allow them to cede risk from their state catastrophe reinsurance facilities to private investors, particularly through catastrophe bonds.

In order to join the consortium, the states would have to meet certain criteria, including meeting loss mitigation standards and only providing relief for 1 in a 100 year events.

In addition, the bill would set up a federal facility to provide low interest loans to states to help build up the reserves for their catastrophe funds. The bill mandates that the loans will be a last resort, and that they would only be available after a loss exceeding 150 percent of the prior year's direct earned premium.

"This bill is a national plan," Rep. Mahoney said yesterday. "It's not a regional plan, it's not a plan for hurricane prone states," he remarked. The bill, Mr. Mahoney added, would help ensure that states can maintain a stable property insurance market.

Critics, however, argued that the measure would encourage states to rely on their catastrophe funds and effective crowd private insurers out of the market.

Rep. Spencer Bachus, R-Ala., ranking minority member of the House Financial Services Committee, said during the markup process to put the bill in final format that, "The committee should consider whether a federal loan to an insolvent state catastrophe fund would be like the federal government's ongoing 'loan' to the National Flood Insurance Program."

The NFIP, he noted, is currently carrying $18 billion in debt to the U.S. Treasury that "is unlikely ever to be repaid." As part of his criticism, he cited the fact that Florida's insurer of last resort, Citizens Property Insurance Corporation, has approximately $434 billion in exposure and the ability to pay only $9.4 billion in claims.

Rep. Judy Biggert, R-Ill., during markup, questioned whether lawmakers should be acting so quickly to make the federal government the ultimate insurer of last resort, arguing that the panel was "rushing to put the taxpayers across the nation on the hook for taxpayers in a handful of states, so they can get cheaper insurance."

Rep. Christopher Shays, R-Conn., introduced an amendment, which would have eliminated the original provisions of the bill with language that would instead create a "blue ribbon" panel to investigate a broad spectrum of proposed solutions to the catastrophe problem.

"We've had a host of arguments" on the issue, both in favor and against the bill, Rep. Shays said, adding that his plan is similar to one that the Senate Banking Committee has already acted on. Even if the House were to pass the Klein-Mahoney legislation, he added, "I just don't think you're going to see action by the Senate" on it, he told the committee.

Financial Services Committee Chairman, Rep. Barney Frank, D-Mass., noted that the committee should not legislate based on what it expects from the Senate, and that he was not a fan, in general, of legislation establishing a committee. "Governing by committee is generally an abdication of congressional responsibility," he said.

Rep. Shays's amendment was voted down by a voice vote.