Compounding Catastrophe

Compounding Catastrophe

Why Federal Involvement in State Catastrophe Insurance Is a Bad Idea
December 02, 2008

Full document available in pdf

Recent events, from the subprime mortgage crisis to the credit crunch, have made clear that not all home ownership is good home ownership. Despite this, some members of Congress continue to propose legislation to promote the bad kind of home ownership, this time by bolstering disastrous catastrophe insurance and reinsurance plans.

There are several problems with these proposals. First, they would encourage poor construction on overbuilt, fragile coasts. Second, they would promote Florida’s unsustainable and dangerously underfunded, underpriced state catastrophe fund. Finally, they would shift the burden of paying for property damage in catastrophe-prone areas to taxpayers around the country, away from the property owners themselves.

The most recent proposed legislation of this kind, the Homeowners’ Defense Act of 2007 (H.R. 3355), is representative of the problems posed by legislation of this kind. It is unlikely to pass this Congress, but its problem features may reappear in other legislative proposals. The Act was introduced by Rep. Ron Klein (D-Fla.) as a response to the devastation caused by a series of hurricanes in 2005. That year, Hurricane Katrina, caused an estimated $80 billion in insured losses, while other storms caused over $200 billion in total economic losses and over $50 billion in insured losses to homeowners.