Two Trade Groups Argue For U.S. Low Income P-C Subsidy

WASHINGTON--Two insurance trade groups have commissioned a paper which suggests that a possible solution to the ballooning coastal insurance availability crisis is for the federal government to offer insurance and mitigation tools to low- and moderate-income homeowners.

The report commissioned by the American Insurance Association and the Reinsurance Association of America was written by Robert Litan, a senior fellow in Economic Studies at the Brookings Institution.

It was released as Congress faces continuing pressure to bail out homeowners in coastal states through support of state catastrophic reserve funds and federal insurance.

Members of Congress and state officials are also pushing insurance companies to provide more affordable coverage as well as to stop limiting exposure in high-risk areas.

At least seven bills have been introduced in Congress this year dealing with the issue.

One, passed by the House in September, would preempt state contract law in certain areas as well as provide wind and flood coverage for homeowners nationwide.

The report noted that the federal government has already established means-tested and geographically targeted subsidies for home heating oil and telecommunications services.

Mr. Litan in his report said the targeted program would be designed to support low- to moderate income coastal homeowners with the purchase of homeowners' insurance and for making qualified investments in catastrophe mitigation.

He suggested that homeowners who have taken mitigation measures and purchased insurance "are much more financially resilient following catastrophe losses, and so it is in the interest of government and taxpayers to ensure those with limited financial means have the ability to purchase it."

These would include securing roofs to the underlying structure and installing high-impact windows or shutters, nonsliding patio doors, or high-wind-resistant garage door and track systems.

The report argued that all states exposed to catastrophe losses have an interest in encouraging their citizens to prevent catastrophe losses.

"The more effective mitigation is, the more lives are saved, more injuries are avoided, and the more rapidly state and local economies can recover after a catastrophe," Mr. Litan said.

He continued that it is "unfair and inefficient to ask taxpayers living in inland locations to pay for the catastrophe losses of those living on the coasts who are financially capable now of purchasing insurance at market rates."

"Simply put, those who are currently exposed to risk now should bear the costs of that risk now," the report said.

AIA President Marc Racicot said in a statement with the report, "The increase in homeowners' insurance premiums we've seen in coastal areas pose especially significant hardships for those residents with limited financial means."

He added, "This report offers a common-sense solution to ease the burden on low- to moderate income residents exposed to hurricane risks."

Frank Nutter, president of the RAA, noted, "All homeowners, including coastal residents, can reduce their catastrophe losses by investing in various mitigation measures."

Mr. Nutter explained that "the federal government clearly has an interest in encouraging this practice, especially among low- to moderate income households, who are likely to be less financially resilient than more affluent households."

Mr. Litan is an economist and lawyer who has held a variety of federal agency and White House positions including service with the Department of Justice antitrust unit during the Clinton administration.