Politics Is Spilling Over Into Cat Insurance Debate

With the start of last week's hurricane season and continued congressional inaction on legislation reauthorizing and reforming the National Flood Insurance Program, the issue of dealing with catastrophic storms is reaching crisis proportions.

Moreover, adding to the problem is the perilous state of the Florida and Texas programs for catastrophic losses. Indeed, several strong hurricanes could force the federal government to pony up as much money to bail out those states as it is spending to prop up General Motors.

While this might seem like hyperbole, even a cursory examination of the issue will reveal that a habit Congress can't kick–delaying decisions it doesn't want to make–is exacerbating the problem and will make it even more expensive to solve.

Authorization of the National Flood Insurance Program ran out Sept. 30, 2008–the end of the last fiscal year.

However, unable to reach a deal between conflicting House and Senate bills after debates that stretched through its entire two-year term, Congress first delayed final action on new legislation until December…then March 2009…and now Sept. 30, 2009.

But as Congress confronts new issues–such as financial regulatory restructuring, coping with the growing budget deficit and paying for health care reform–it appears more and more likely that action on the NFIP will again be delayed.

In baseball, if your pitcher can't get the ball over or is grooving 'em, and you are behind by, say, 12-0 by the third inning, you pray for rain. As you are aware, however, Congress plays in an indoor arena, so that doesn't work.

As a result, it is unclear whether the bills passed by the House and Senate last year are even on the table because both died when Congress adjourned, and there have been no moves to restart talks on a potential compromise.

The Senate bill passed last year forgives the NFIP's $17 billion debt generated by Hurricane Katrina.

It also corrects what Eli Lehrer, a fellow at the Competitive Enterprise Institute, calls "many of the worst absurdities in the program"–such as limiting the number of times the NFIP will pay to restore the same property–and contains a number of measures that will encourage mitigation.

The House bill, however, contains language adding wind losses to the program, which is generally opposed by the insurance industry–and, now, in no uncertain terms, by the Obama administration as well.

It also merely calls for a study of how to deal with the program's debt, and effectively preempts provisions of Mississippi and Louisiana law that limited the impact on insurer balance sheets of the Hurricane Katrina and Rita disasters.

Concerns about how backing down might impact certain members of Congress are keeping the House from accepting the Senate version. Added to the political mix is the poor economy, a new administration with different priorities, and continuing problems in Afghanistan and Iraq, driving NFIP reauthorization further down the priority list.

In the Senate, the decision of Sen. David Vitter, R-La., to make it a major plank of his reelection campaign to pour more money into areas where claimants have multiple storm losses is delaying action on NFIP reauthorization, as each member seeks to protect their own flock.

Exacerbating the problem is the perilous state of the economy, which is having a big impact on state revenue, as well as the desultory state of the municipal bond market.

A bill has been introduced in the Senate, for example, that would allow the Treasury to potentially provide up to a $25 billion letter of credit to each of a number of states, but it is primarily designed to aid Florida in the event of a catastrophic event.

This would be used to back municipal bonds, which would be issued to repay insurers that bought cheap reinsurance from the state after being forced to keep homeowners' rates low.

But according to Mr. Lehrer, Florida "does not have a practical plan or the proper tools" to pay back the U.S. Treasury, "so all U.S. taxpayers would end up footing the bill for whatever Florida borrows."

Moreover, while actuaries believe the Florida reinsurance program is underfunded by up to $25 billion, no state has ever borrowed more than $12.3 billion at one time, according to Mr. Lehrer.

Texas, too, is in trouble. The state-chartered insurance fund that covers most coastal residents is broke after paying for Hurricanes Dolly and Ike, which hit Texas last summer. "And legislators in Texas so far have been unwilling to take steps to raise rates statewide and to fix the ailing windstorm program," Mr. Lehrer noted last week on National Public Radio.

Conservatives in Congress and their right-wing financial backers are voicing outrage about the more than $50 billion the Obama administration has invested to bail out GM and Chrysler. I wonder what they will say when the bill to clean up our disjointed, chaotic system for dealing with catastrophic weather losses is presented.