Catastrophe Insurance Bill Under Fire At House Hearing

NU Online News Service, March 10, 4:02 p.m. EST

WASHINGTON–The bill, the Homeowners Defense Act, H.R. 2555, was introduced by Rep. Ron Klein, D- Fla. Sen. Bill Nelson, D-Fla., has filed companion legislation in the Senate.

Primarily, the bill would establish a national catastrophe risk consortium for states to pool risk, creating a new federal reinsurance program for state catastrophe funds.

The bill was strongly supported by James Lee Witt, who testified on behalf of ProtectingAmerica.org, of which he is co-chairman.

He testified that "there is an urgent need" for such a program because it would be a comprehensive and integrated program that "strengthens America's financial infrastructure [and] improves mitigation and readiness to prepare and protect our families and communities before and during catastrophe."

Also supporting it was Glenn Pomeroy, chief executive officer of the California Earthquake Authority.

The hearing was a joint one, held by the Housing and Capital Markets Subcommittees of the House Financial Services Committee.

Among its other provisions, the bill would allow the CEA to lower its earthquake insurance rates and policy deductibles.

"We believe that offering a more affordable earthquake insurance policy would help more Californians to insure their homes for potential earthquake damage," Mr. Pomeroy testified.

He added, "By reducing costs, and as a result insuring more California homeowners, financial pressures also could be reduced for the federal government after the next big earthquake strikes."

But Steve Ellis, testifying on behalf of Taxpayers for Common Sense, called the bill "fundamentally flawed."

He said it would primarily benefit only Florida and California because a key part of the bill is that it is a federal reinsurance program only for "eligible" state programs. Currently, Mr. Ellis said, "only Florida and California have programs that would meet the criteria specified in the legislation."

He added, "The euphemistically named Homeowners' Defense Act would actually end up putting taxpayers at risk and subsidizing people to live in harm's way. Taxpayers across the country would be forced to pay for a narrow bailout that primarily helps the well off. It doesn't make sense."

In testimony submitted at the hearing, Eli Lehrer, a policy analyst at the Heartland Institute, Washington, D.C., derided the bill "as a beach house bailout."

Mr. Lehrer said, "There's no other way to describe it. Although cloaked in the language of free markets and fairness, the legislation would be an enormous subsidy for people who choose to live in dangerous areas."

He added, "If stupid, rich people want to build mansions on sand dunes, they are entitled to do so. But they shouldn't get insurance subsidies from the taxpayers to do it. And this bill would provide them."

Also in submitted testimony, officials of the Property Casualty Insurers Association of America (PCI) and the National Association of Mutual Insurers criticized the bill.

"PCI shares the concerns expressed by taxpayer, environmental and other groups," said David A. Sampson, PCI president and CEO.

He said the bill "would broadly shift" taxpayer resources from the entire country to benefit specific catastrophe-prone areas through the proposed federally subsidized bond guarantees and the reinsurance catastrophe fund provisions.

"That approach is costly to all taxpayers and threatens to displace the private market," he said.

Mr. Sampson explained that, by providing government subsidies to artificially suppress costs for coastal properties, "the bill would encourage development in high-risk and environmentally sensitive areas."

A NAMIC official said in submitted testimony that enactment of the bill "could ultimately expose the taxpayers to further risk and damage reform efforts at the state level."

Kathy Mitchell, a director of federal affairs at NAMIC, said a better approach is for Congress to enact legislation that encourages coastal states to adopt and enforce stronger building codes, and to curtail further development of ecologically sensitive coastal areas.

If that happens, "it can slow the growth in coastal catastrophe risk exposure," Ms. Mitchell said.