Federal Cat Bill Confronts Capitol Hill Obstacle Course

Even the fact that some state officials are holding the issue over the heads of presidential candidates is unlikely to persuade the Senate to follow the House lead and act promptly on legislation aimed at helping coastal states manage their catastrophic risk, some industry observers say.

The legislation passed the House with bipartisan support on Nov. 9.

But the fact that it faces major hurdles in the more politically complex Senate was brought home through the announcement by Sen. Chris Dodd, D-Conn., that he was introducing his own legislation aimed at helping coastal states with high risk of catastrophes in more modest ways.

Sen. Dodd launched his initiative even though Sen. Hillary Clinton, D-N.Y.--the current favorite for the Democratic presidential nomination--had introduced legislation in the Senate similar to the House version, the day after the House vote called for prompt action in the Senate.

With Florida a major supporter of the legislation and a presidential primary in the Sunshine State looming early next year, support for the bill by various U.S. senators running for president will help keep the issue alive, industry observers note.

However, beyond internal congressional disputes and presidential politics, potentially insurmountable hurdles face the bill, including a veto threat from the Bush administration and an insurance industry divided on the issue.

The vote on the "Homeowners Defense Act of 2007," H.R. 3355, was 258-155, propelled by solid support from members of both parties from Florida, Louisiana, California and other coastal jurisdictions.

The legislation is designed to help coastal states cope with catastrophes by pooling their risk and transferring it to the private market through catastrophe bonds or reinsurance.

The bill also would create the National Homeowners Insurance Stabilization Program, under which the Treasury secretary can extend loans to states impacted by severe natural disasters.

Sen. Clinton joined Sen. Bill Nelson, D-Fla., two days before the House vote in introducing companion legislation in the Senate.

But while the House debate was underway, Sen. Dodd--powerful chair of the Senate Banking Committee and also a presidential candidate--introduced two bills designed to deal with the soaring cost of homeowners insurance in coastal areas in more limited ways.

It is Sen. Dodd's committee that has primary jurisdiction over the bill and has great discretion as to how it will be dealt with in the Senate.

However, in a statement of policy in which the White House said it "strongly opposes" the House bill, the Bush administration explained: "Although pooling can be an effective mechanism for managing risk, there is no need for a federal role because states are currently free to associate to address catastrophe risk."

Furthermore, the White House said: "The consortium's federal charter would create an implicit guarantee that the federal government backstops the consortium's financial obligations."

The statement said this implicit guarantee would result in an "inequitable federal subsidy for certain state insurance programs and policyholders."

But a veto threat didn't deter House supporters, who engaged in an hour of general debate and then slogged through 14 amendments to the bill before passing it around 9:00 p.m.

Its two main sponsors were South Florida Democrats Ron Klein and Tim Mahoney.

Rep. Klein opened debate by saying: "It is important to understand that insurance affordability and availability problems are becoming an issue across the country."

He added that hundreds of thousands of homeowners have faced significant rate increases or been dropped altogether, "and not just in the Gulf states but also Maryland, New York and Massachusetts."

"It is simply unacceptable for property owners not to be able to get coverage in these markets," he said.

Rep. Mahoney added that the bill is "a turning point for how the federal government responds to natural disasters."

He said it "ensures that we plan for them in a fiscally responsible manner and ensures that it will not cost the taxpayers a dime."

The manager for opponents was Rep. Shelley Moore-Capito, R-W.Va., who said: "We are all concerned about insurance rates that are increasing in Florida and in other states."

However, she added, "at this point there is no consensus that H.R. 3355 is the best solution to the problem." She explained that the bill "could put the taxpayers at risk for bailing out" state insurance pools, pointing to Citizens in Florida as an example.

The insurance industry also appeared divided on the legislation. Representatives for the Reinsurance Association of America and the American Insurance Association both said their members opposed the bill.

"This legislation falls short in trying to address the problems in coastal insurance markets," said AIA President Marc Racicot.

He added that in the AIA's view, the bill "will not generate new private sector insurance, reinsurance or capital market capacity, and is likely to encourage states to create thinly financed, state-run reinsurance facilities that will displace the private market and require a federal government bailout in the event of a catastrophe."

Franklin W. Nutter, president of the Reinsurance Association of America, said the House vote raised 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.

"Government is not the right solution," Mr. Nutter said. "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."

But Joseph Annotti, senior vice president of public affairs at the Property Casualty Insurers Association of America, said House passage "opens the door to additional discussions in the Senate about ways to enhance the measure to include critical market freedom provisions that would work in tandem with a federal liquidity facility."

Additionally, some of PCI's members, including Allstate, are members of ProtectingAmerica.org, which strongly supports the bill.

In a statement, James Lee Witt, former director of the Federal Emergency Management Agency and co-chair of ProtectingAmerica.org., said: "Passage of this bill, coupled with the recent introduction of its Senate companion bill by Sen. Clinton and Sen. Nelson, are major steps toward the establishment of a comprehensive and integrated state and federal, public and private national program to improve the way American families are prepared for and protected from massive natural catastrophes."