Bill To Create U.S. Catastrophe Pool Introduced

NU Online News Service, May 22, 11:33 a.m. EDT

A Florida legislator yesterday reintroduced the Homeowners' Defense Act, legislation which would allow states to join a national catastrophe insurance pool.

The bill is sponsored by Democratic Rep. Ron Klein.

It drew an immediate reaction of measured support from the Independent Insurance Agents and Brokers of America. However, the bill is expected to generate the same opposition from carriers and reinsurers that doomed it in the last Congress. And, even the IIABA said it would seek changes in the reinsurance component of the legislation.

The bill, H.R. 2555, is similar to legislation that passed the House in 2007 but was rejected by the Senate in 2008 as an amendment to legislation that would reform and reauthorize the National Flood Insurance Plan.

One problem is that it establishes a debt guarantee program that would authorize the Treasury Department to guarantee debt issued by eligible states to assist in their financial recovery from natural catastrophes.

Another difficulty is a provision to allow the Treasury Department to write reinsurance contracts covering catastrophic-level events and establish a grant program to develop, enhance and maintain programs that prevent and mitigate losses from natural catastrophes.

All these conflict with a recent Obama administration budget document that says the administration hopes to revisit the Terrorism Risk Insurance Program to see if its high budget impact can be reduced.

Rep. Klein maintained his bill has "broad bipartisan support," with more than 40 co-sponsors from 21 states across the country.

He said that "prospects for passage are extremely favorable, buoyed by the innovative approach and strong support of President Obama, who co-sponsored the legislation as a member of the U.S. Senate two years ago."

The bill would create the National Catastrophe Risk Consortium, which states could join for purposes of transferring catastrophic risk. The transfer would be achieved through issuance of risk-linked securities or through reinsurance contracts.

The consortium, under the bill, would serve as a conduit issuer of cat bonds on behalf of participating states, but would not take actual possession of any bond proceeds, coupon payments or underlying risk, according to a summary of the bill's provisions.

In its comments, the IIABA said it supports the goals of each of the programs that would be established under the bill, but also encourages Congress to consider making changes to the reinsurance title of the legislation in particular.

"While the Big 'I' appreciates Congress' consideration of a national reinsurance backstop for natural disaster insurance, we feel that such a backstop would better encourage private market participation in problematic markets if it allowed private market participation instead of just state catastrophe funds," said Charles E. Symington Jr., senior vice president of government affairs.

"We will continue to advocate that Congress consider a solution utilizing the private markets instead of merely state catastrophe funds," he said.

An opponent of the bill, a group called the Americans for Smart Natural Catastrophe Policy, issued a statement saying, "A federal [catastrophe] backstop would subsidize a status quo that endangers the environment, imposes enormous costs to taxpayers and decreases the availability of insurance. While this measure overwhelmingly benefits Florida, it ironically perpetuates a system that the Florida legislature – supported by environmentalists, business leaders, charities, taxpayer groups and others – is in the process of reforming.

"The smarter and safer way to reform natural catastrophe policy is to safeguard homes and businesses before disaster strikes."

The introduction of the bill was praised by ProtectingAmerica.org, the group that was founded with major support from Allstate and for several years has beencampaigning for a federally backed national catastrophe program.

"This bill takes meaningful and important steps toward improving America's system of dealing with natural catastrophes. The bill will improve mitigation and land use policies, strengthen first responder programs and provide a fiscally responsible way for our nation to prepare for the event of a truly massive natural catastrophe," said James Lee Witt, former Federal Emergency Management Agency director and a co-chair of ProtectingAmerica.org.

"The 2009 Hurricane season begins June 1 and it is my hope that immediate action will be taken before the peak storm activity in the fall," he said.