The House Financial Services Committee passed legislation last week designed to allow Uncle Sam to help states shore up their catastrophe reserves.
The panel acted despite criticisms from some Republicans that the bill would crowd out private insurers and faces an uncertain future in the Senate. The vote was 36-27.
In a statement, American Insurance Association President Marc Racicot, a former governor of Montana, said the legislation continues to cause serious concerns for AIA's member companies, who 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–H.R. 3355–was introduced by Reps. Ron Klein, D-Fla., and Tim Mahoney, D-Fla. The bill would establish a federal-state consortium that states could join to allow them to cede risk from their catastrophe reinsurance facilities to private investors–particularly through catastrophe bonds.
To join the consortium, states would have to meet certain criteria, including meeting loss mitigation standards and only providing relief for one-in-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 would only be available after a loss exceeding 150 percent of the prior year's direct earned premium.
"This bill is a national plan," said Rep. Mahoney. "It's not a regional plan–it's not a plan for hurricane-prone states." The bill, he 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 effectively crowd private insurers out of the market.
"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, which is currently carrying $18 billion in debt to the U.S. Treasury that is unlikely ever to be repaid," said Rep. Spencer Bachus, R-Ala., the ranking minority member of the panel.
As part of his argument, he said Florida's insurer of last resort–Citizens Property Insurance Corp.–has approximately $434 billion in exposure but only has the ability to pay $9.4 billion in claims.
Rep. Judy Biggert, R-Ill., questioned whether lawmakers should be acting so quickly to make the federal government the 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 along those lines, 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.
However, that final point did not deter the committee's chair–Rep. Barney Frank, D-Mass.–from moving forward, arguing that the committee should not legislate based on what it expects from the Senate.
Rep. Frank added that he is not a fan in general of legislation establishing a blue ribbon panel. "Governing by committee is generally an abdication of congressional responsibility," he said.
Rep. Shays' amendment, after initially being rejected in a voice vote, was later voted down 32-22 in an official roll-call.
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